Action memes are making a resurgence as the broader stock market ends the first quarter on a good note.
Although the stock meme frenzy hasn’t quite reached the same intensity as in 2021, when GameStop (GME) and AMC (AMC) stocks propelled to new heightsthe meme phenomenon has continued among a concentrated handful of notable figures.
In recent trading, for example, there has been renewed interest in GameStop (GME) triggered in part by new additions to the market via an IPO, such as Reddit (RDDT) And Trump Media & Technology Group Corp. (DJT).
Reddit shares soared more than 90% to more than $65 per share in its first three days of trading, well above its IPO price of $34 per share. Shares of the social media platform, however, continued to experience volatility, falling to around $49 as of Thursday’s close.
And after initially increasing up to 50% on its first day of tradingTrump Media also saw a decline in its value later in the week, with the stock closing Thursday’s session around $62 per share.
“It’s been momentum since early November, but the most dynamic stocks are usually the ones that have delivered the goods,” Steve Sosnick, chief strategist at Interactive Brokers, said on Yahoo Finance Live (video above ) about the broader market recovery. “We’re starting to see people chasing stocks just because they’re going up, not for any fundamental reason. That, to me, indicates froth.”
Annex Wealth Management’s Brian Jacobsen told Yahoo Finance Live that investor interest in meme stocks could be directly linked to the FOMO mentality, or fear of missing out.
“They’re trying to find the next new thing, and they’re just starting to chase it and pile on it,” Jacobsen said. “It can obviously work well, but it can also end in tears, especially if you don’t address these names early enough.”
3 characteristics of meme stocks
But what exactly is a meme stock?
Sosnick explained that there are three main criteria for evaluating whether a stock belongs in the category.
The first indicator of a meme stock is a “quasi-religious fervor,” according to Sosnick.
“It’s one thing to be excited about a stock, it’s another to be so excited about it,” Sosnick said. “Think about how the real monkeys were in AMC, the real followers of GameStop in the early days. You can definitely say that about the former chairman’s base, who I think helped move DJT stock. “
The second criterion is contempt for fundamentals. Traditionally, investors look for opportunities that provide financial returns over a long-term time horizon, particularly those that can outperform the market over that same period.
On the other hand, many meme stock investors have a much shorter time horizon in mind as they seek to quickly flip speculative assets if prices rise to generate a large profit.
“If you believe in the faith of a stock, if you have a non-analytical view of the stock, then you might ignore the fundamentals,” Sosnick added, noting that stocks traded on momentum can seem expensive “for n ‘anyone”. conventional measures.
Finally, Sosnick said investors should watch for high short interest.
Short interest refers to bets made by investors that the price of a stock will fall rather than rise. In the case of DJT, high short interest was a precedent but remained within a high range of 11%. The average short interest for public companies is typically between 3% and 4%, but can reach as high as 40% when investors are more pessimistic.
Essentially, by Sosnick’s definition, meme stocks appeal to intense passion on the part of retail investors who are willing to take more risks and ignore some of the more conventional investment strategies for a chance to get higher returns, especially in the short term.
Public COO Stephen Sikes largely agrees, although he doesn’t think it’s that simple. Sikes said meme stocks are attractive to a wide variety of investors with different goals and strategies, not just those looking to flip them for an immediate return.
“We have some investors who buy and hold for the long term, and others are traders who try to take advantage of market volatility and momentum,” Sikes said. “They see an opportunity here more than the quasi-religious fervor that might have been seen in earlier eras. »
As for why meme stocks are back in the spotlight, Sikes told Yahoo Finance that a combination of investors’ familiarity with a company’s products or brand and increased market volatility is probably to blame.
And when asked where investors might find the next targets of the “meme craze,” Jacobsen noted that the market could shift toward the small-cap sector and underperforming sectors such as industrials, manufacturing industry and public services.
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