Five things to know about meme stocks like GameStop and AMC - and why they're hot again

By Charles Passy

Once again, Roaring Kitty is at the center of the meme-stock craze

The meme-stock craze is getting crazy again.

Traders have been buying and selling shares of GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC), two of the most prominent meme stocks, at a frenzied pace in the last couple of days. After closing Friday at $17.46, GameStop shares touched as high as $64.82 Tuesday. That made for a 271% gain, though the stock has since pulled back.

GameStop's sharp rally comes despite an absence of new business information about the company. That dynamic may have investors, to say nothing of the general public, a bit confused as to what exactly constitutes a meme stock and what prompts one to go up and down so quickly. Here is a primer to help guide you.

So, what makes a stock a meme stock?

It's all about the buzz the company is generating, especially on social media, as opposed to the traditional yardstick of valuing a company according to business fundamentals. Meme-stock companies "are not generally defined by their financial attributes such as sales growth, earnings per share, or balance-sheet characteristics," according to a market commentary from Bradley, Foster & Sargent, an advisory firm. In other words, the company and its stock become famous for being famous - and that fame grows in meme-like fashion (hence, the name).

It's worth noting that the buzz happens not necessarily because of a coordinated shareholder effort. Or as Investopedia notes, the "shareholders are often an unorganized set of independent individuals, each with their own investment views and preferences." But there's clearly a snowball effect: The more people talk up a stock, the more others join the conversation.

What triggered the initial craze?

There have always been companies that have seen their share prices soar in wild, speculative fashion. Some financial experts have even likened the meme-stock phenomenon to the Dutch tulip bubble of the 17th century. And let's not forget the dot-com bubble that started about a quarter-century ago, either.

In a more immediate sense, the meme-stock craze started around 2021, particularly as a result of discussions on the WallStreetBets Reddit forum, which proved popular with young investors who didn't necessarily want to follow traditional strategies. In some cases, meme-stock investors saw opportunities to react against short sellers who were looking for a stock to decline. That was especially the case with GameStop, a company that sells gaming-related equipment and is one of the most noted of meme stocks from that period. Other meme-stock companies from that first wave included AMC, BlackBerry (BB) and the now-defunct Bed Bath & Beyond.

What's triggering the new craze?

Enter Roaring Kitty - or rather, re-enter Roaring Kitty. That's the handle of investor Keith Gill. He was behind the initial rise of GameStop and became something of a social-media legend in the meme-stock shareholder community.

He hadn't been heard from much lately. That is, until he returned to X on Sunday to make his first social-media post in three years. Mind you, the post wasn't very specific - it was just an illustration showing a man moving from sitting back in a chair to leaning forward.

But it was enough to create lots of buzz. The X post generated nearly 25 million views. And it has been followed with others - namely, a series of videos that are similarly cryptic in nature but perhaps imply that Roaring Kitty is returning to, well, roar. Since then, GameStop's stock has taken off, and so has AMC's.

In effect, Roaring Kitty has become the flag-waver the meme-stock community needs to come together and start trading. James Clunie, a director at investment consultancy Long-Short Consulting, told MarketWatch that it's all about the "gamification" of markets, with Roaring Kitty in the driver's seat. "Given Roaring Kitty's ability to coordinate traders...it doesn't seem irrational for traders to get involved and 'play,'" Clunie said.

Why do so many investment professionals warn against joining the craze?

Don Calcagni, chief investment officer at Mercer Advisors, summarizes how many financial professionals view the meme-stock situation thusly: "It's a mirage."

By that, Calcagni means investors may be lured into buying a meme stock based on its sudden gains, but they shouldn't necessarily think those have any bearing on its future returns. It all goes back to the point that meme stocks aren't driven by sound financial fundamentals. Calcagni is quick to note that GameStop is trading at such vast multiples of its anticipated earnings that it's "beyond Pluto."

"There is no rational case for the current stock price," Calcagni told MarketWatch, adding that buying meme stocks isn't really investing at all. "This is speculating," he said.

Not that there aren't some who make money off meme stocks. That's the nature of any form of speculating or gambling, Calcagni notes, pointing to those who might win big at Vegas upon occasion. But Calcagni said if you really want to take advantage of fast-moving stocks, you're better off leaving it to the professionals and also seeking some form of diversification to spread the risk. That's why he suggests buying a momentum ETF as an alternative approach to buying a single meme stock.

And hey, isn't there a movie about this meme-stock stuff?

There is, indeed. "Dumb Money," released in 2023, told the story of Keith Gill (aka Roaring Kitty) and his GameStop adventure. In a Wall Street Journal review, Kyle Smith called it "an ungainly subject for a movie" and panned Paul Dano's performance as Gill, saying it "gives the film a hollow core." The film was reportedly produced with a $30 million budget, but has grossed only $20.7 million to date, so it hasn't actually been a moneymaker itself.

-Charles Passy

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05-15-24 1015ET

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