Meme-stock crowd heads into 2022 with "its first taste of reality"

The 2021 rush to heavily shorted "meme stocks" accomplished at least one thing where the longest bull market had failed: It brought young retail investors into the fold. 

Individuals who had sat out Wall Street's more than a decade-long winning run jumped into stocks this year, lured by a trading mania that had hundreds of thousands of investors buying into struggling old-school companies like cinema chain AMC Entertainment and video game retailer GameStop as both became fodder for online chat rooms.  

A company would "somehow end up in a chat room discussion on Reddit and become the belle of the ball," recalled Peter Boockvar, chief investment officer at Bleakley Advisory Group in Fairfield, New Jersey. 

Pandemic-era remote work and stimulus checks helped get the party going. Stuck at home with cash on hand, rookie investors swamped social media platforms to urge others to purchase shares of AMC, GameStop and other companies whose prospects looked dismal by traditional stock-valuation standards like profitability, debt loads and earnings growth.

In decline for a decade, GameStop's shares suddenly spiked in January, skyrocketing to $347 from $39 in a single week as retail investors — spurred by Gen Z-friendly apps like Robinhood that let users trade stock for free — poured into the markets.

"It's one of those things that became apparent very early in the year: The ability for the Wall Street chat boards to find heavily shorted stocks that could very well have a future or be squeezed higher — and GameStop was the poster child for this," Art Hogan, chief market strategist at National Securities, told CBS MoneyWatch. 

The standoff between hedge funds and ordinary investors bidding up GameStop to counter or "squeeze" the hedge funds short-selling it, or betting the price would fall by a certain date, prompted some brokerages to halt trading in GameStop and dozens of other small public companies experiencing big price swings. Cue social media outrage and congressional and regulatory scrutiny, the latter of which continues into the new year.

Robinhood: The definitive meme stock?

"The extreme volatility in meme stocks in January 2021 tested the capacity and resiliency of our securities markets in a way that few could have anticipated," the Securities and Exchange Commission found in April. "At the same time, the trading in meme stocks during this time highlighted an important feature of United States securities markets in the 21st century: broad participation."

The meme-stock frenzy even had Robinhood becoming a meme stock once it went public this past summer, sending the company's shares up 50% to close at just above $70 in August, despite the threat of new regulations hovering over it and other trading apps. On Twitter, folks delighted in the idea of buying into the definitive meme stock: "How do you value 500m teenage angst-ridden mostly male loners?" asked one poster. 

In further evidence of social media's impact, shares of current Reddit favorite Ford Motor have recently been besting Tesla, and are finishing the year with the Detroit automaker's shares up almost 140% to about $21.  

The meme-induced roller-coaster ride recently had shares of Avis Budget making an abrupt and surprising jump. Newly favored by retail investors, shares of the rental car company rose 58% in November and are now up more than 450% for the year to over $200.

Even more astonishing year-end gains are still being tallied by AMC and GameStop. AMC is up more than 1,200% since last January 1 to $28 a share and has a total stock market value of $15 billion; GameStop is up a more modest 725% to around $150 and valued at nearly $12 billion. 

"Even meme stocks" can go down

But the trajectory has not been a one-way burst higher for all, Hogan noted. "By the end of the third quarter or start of the fourth, we got to the point where valuations seemed to matter — even meme stocks don't grow to the sky. That's the new reality they face," he said. "It feels like the meme-stock army has already had its first taste of what reality looks like when fundamentals kick in."

Boockvar concurs, saying fundamental stock analysis will reclaim center stage, "rather than 'who is shorted' and 'is it trending.'" 

Bed Bath & Beyond relinquished gains after garnering some interest from the meme-stock crowd, and its stock is now down almost 18% year-to-date to about $14.50. Shares of the retailer spiked in November to as high as $24 amid a large increase in mentions on Reddit, CNBC reported.

Hometown International, the operator of a small New Jersey deli that generated all of $13,976 in sales in 2020, hit a stock market capitalization of $113 million in February. The penny stock was delisted by the OTCQB over-the counter-market in April after catching the attention of prominent hedge fund manager David Einhorn.

"The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli," Einhorn's Greenlight Capital wrote in an April letter to clients. "The pastrami must be amazing."

The hot rallies and rapid-fire selloffs that define meme stocks seem to be on more of a simmer as Wall Street heads into 2022. Future volatility may well depend on how dominant a role retail investors continue to play — and whether there will be enough cash on the other side of their short-squeezing trades to play against. 

"The short crowd got burned by this; they've been decimated. So there's not a large short crowd around to essentially roll over," Boockvar said. 

Boockvar believes those driving the meme-stock movement will move on, whether to the latest hot cryptocurrency plays or something else. "In the history of markets, there's always a speculative mania that flames out; that's just human nature."