With meme stocks in a lull, here's where retail investors may turn their attention next

By James Rogers

The dynamics that fueled the meme-stock frenzy have not gone away, according to a recent study

Meme stocks were thrust into the spotlight once again this year as influential trader Keith Gill, also known as Roaring Kitty, made his return to social media and sent a number of stocks surging.

While this time around, the action didn't reach the heady heights of the 2021 meme-stock frenzy - in which Gill was a pivotal figure - it did impact a host of heavily shorted names. Original meme stocks AMC Entertainment Holdings Inc. (AMC) and GameStop Corp. (GME) may have grabbed most of the attention, as they did in 2021, but Koss Corp. (KOSS), BlackBerry Ltd. (BB), SunPower Corp. (SPWRQ), Maxeon Solar Technologies Ltd. (MAXN), MicroCloud Hologram Inc. (HOLO), Children's Place Inc. (PLCE), Beyond Meat Inc. (BYND), Spirit Airlines Inc. (SAVE) and Plug Power Inc. (PLUG) were also swept along by the latest meme wave. Chewy Inc. (CHWY) was also caught up, and it was subsequently revealed that Gill was holding a significant position in the online retailer of pet food and products.

In research published in May, a group of U.K.-based academics examined the behavioral dynamics of social-media stock traders. The study, which looked at sentiment in the WallStreetBets community on Reddit, analyzed four years of data ending in 2021. Researchers trained their language model on around 1 million comments and analyzed about 10,000 posts.

Also read: Roaring Kitty, rumors, and 'tin foil hat conspiracy theorists': What's next for meme stocks?

"What we saw, certainly in 2021, is an example of a relatively unknown community making an impact on an individual stock, and a market impact," Richard Whittle, a university fellow in artificial intelligence and human behavior at Salford Business School and one of the study's co-authors, told MarketWatch. "It's what happens when you have a 'left-behind' community."

Stuart Mills, a lecturer in economics at Leeds University Business School and the study's lead author, told MarketWatch that he would be surprised if there were a repeat of the 2021 meme-stock frenzy. However, he said, that type of attention could be focused on "some sort of readily available financial asset with the promise of big gains very quickly."

Whittle added: "We have no idea what's coming next, but I suspect that a big portion of it will be how easily accessible it is."

Whittle pointed to the community's feelings of being "economically insecure" and of "trying to close that gap," as well as their access to investment opportunities via smartphone apps.

Related: These behavioral trends drove the GameStop and AMC meme-stock rally

Mills said that the dynamics that fueled the meme-stock frenzy have not gone away. "I think it's a mistake to think that the hype is over," he told MarketWatch. "If you look at the economics of everyday living, it's become harder for people, not easier."

The researchers say that Prospect Theory, which explains how people make decisions when they have uncertain outcomes, is useful for understanding the community that drove the 2021 trading in meme stocks. Many of the retail traders whose posts the study analyzed felt as if they were losing and thus demanded a substantially positive return in order to feel as if they were gaining anything, the study found. Indeed, the research suggests that a WallStreetBets investor expected returns of at least 36% and was dissatisfied with returns below that, even positive ones.

The study, the researchers write, may challenge popular narratives that the WallStreetBets community is "highly esoteric" in its trading behavior and "apathetic" to the stock market. "Our results suggest the typical [WassStreetBets] trader may be remarkably normal, insofar as they may be loss averse, inexperienced, and influenced by community framing effects," the researchers said in the study.

Related: Why Roaring Kitty is a GameStop 'true believer'

"For me, pretty much the surprising thing was that this community expected a high return and they had a lot of loss aversion," Whittle told MarketWatch. "They want big returns - large, excessive returns - but if we factor that in, they expect in a rational way after that."

Before 2021, WallStreetBets was "a much more diverse platform" in terms of the topics being discussed, according to Mills. While there was a spike in discussion about GameStop in October 2020, interest went back to normal levels in November and December of that year before the meme-stock frenzy kicked off. "They used to talk about pharmaceuticals and biomedical," he said. "They used to talk about stocks like Tesla as well."

"The group has changed dramatically since [the] GameStop [frenzy in 2021]," said Mills "Since GameStop, it has become more devoted to a narrow group of stocks and less focused on broader investing strategies."

Related: This company's performance is challenging the traditional definition of meme stocks

Gavin Brown, a senior lecturer in financial technology at the University of Liverpool Management School, also co-authored the study.

-James Rogers

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09-21-24 0654ET

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