Bruised but unbowed: meme stock investors are back for more

After feeling the thrill of victory early this year by singlehandedly causing GameStop’s stock to soar – only to get crushed when it quickly crashed back to earth – armies of smaller-pocketed and novice investors are back for more.

These undaunted investors have resuscitated GameStop shares back above $300, up from $40 in February after plunging from a peak of $347. They’re also hauling new stocks onto the bandwagon they say is heading for the moon, including the lesser-known health insurance company Clover Health Investments.

This second wave of leaps for meme stocks are just as staggering – the movie theater chain AMC Entertainment soared to $62 last week from $2 early this year – and once again professional Wall Street is calling the gains illogical. Many of these professionals had predicted the phenomenon of regular, small-fry investors piling into a stock en masse and sending it incredibly higher would fizzle out, particularly after they felt the pain of losing some money.

Instead, the frenzy has endured and shows how powerful these investors remain, at least for now. They’re armed with social media where they can convince others to champion the same stocks. They also have zero-fee trading apps that allow many to buy stock options, which can offer bigger gains at a smaller upfront cost than buying a share of stock, in exchange for potentially bigger percentage losses.

“They’ll do surprising things if given the tools,” said Hossein Azari, CEO of cmorq, a company that helps customers get into cryptocurrencies and advocates for a new world of “decentralized finance.”

Azari sees it all stemming from people feeling left out as they watched wealthy investors and firms suck up the majority of the economy’s gains in recent years. Now they see a way to get some for themselves.

“They are not out there trying to prove anything,” he said. “They just want to kind of materialize the American dream for themselves.”

Some of the meme-stock buyers believe fervently in the financial futures of the companies they’re backing. Others say on social media posts that they’re merely looking to cash in on whatever the next hot stock is. Most say that as long as other like-minded investors stick together and hold the stock, they’ll protect each other and the stock’s price.

Malcolm Ethridge, a financial adviser with CIC Wealth outside Washington, D.C., said a range of his clients want to talk about meme stocks, as well as cryptocurrencies. Ethridge also says it’s not only younger investors pushing up meme stocks – he’s gotten just as many requests from his clients who are retirees.

“I think in most cases, though, they really just wanted a professional to tell them why it wasn’t a good idea to get involved just so that they could stop feeling like they were missing out,” he said.

This resurgence for meme stocks is a little different from the earlier supernova. For one, it hasn’t dragged down the broader stock market. Back in January, the mania helped knock down the S&P 500 to its worst day in months. That was a result of fears that some hedge funds would have to sell big, unrelated stocks to raise cash to cover losses they were taking after betting that GameStop would fall.

Several of today’s meme-stock winners do have chunks of their shares sold “short,” where investors have made trades to profit if the price falls, but not to the same degree as in January. At GameStop, roughly one in five of its shares available to trade has been sold short, for example. Earlier this year, more than 100% of them effectively were, with some getting shorted multiple times.

The buying activity this time around also seems less fervent. Trading in call options, which can give a buyer the right to buy 100 shares of stock at a set price at a later date, surged to a two-month high recently. But it’s still below the heights set in January.

Over the last year, trading activity for call options on single stocks has tended to move up and down with how restricted the economy has been by the pandemic, according to Deutsche Bank strategists. When people have been leaving their houses more often, call option trading has tended to fall off, which makes the last few weeks a notable exception.

So, if getting burned by plunging prices for meme stocks once before didn’t stop them, and the possibility of doing things other than trading options while sitting on a couch hasn’t so far, what could slow the phenomenon?

Regulators and politicians in Washington have been discussing some options, though nothing’s come out of it yet.

Gary Gensler, chair of the Securities and Exchange Commission, gave a speech Wednesday where he once again criticized “gamified” investing. Many trading apps use features that encourage customers to make trades more often. That brings in more revenue for the apps but some research also suggests it leads to lower returns for the average investor.

Gensler said he’s asked the SEC’s staff to gather public input on the topic. He also said he’s asked the staff for recommendations on changes to rules that govern the stock market’s plumbing and how trading apps route retail investors’ orders, to make sure they’re getting the best execution.

GameStop separately said late Wednesday that the SEC’s staff is conducting an investigation into the trading activity in its stock and those of other companies. GameStop, which received a request for documents on May 26, said it doesn’t expect the inquiry to hurt the company.

The SEC and other regulators could look for ways to force trading apps to offer more warnings to customers in hopes of slowing them down, said John Coffee, a professor of law at Columbia University. They could start with making it clearer that trading options can be riskier than buying actual shares of a stock.

Coffee is skeptical GameStop, AMC and others can hold onto their lofty prices, which would need profits to explode higher extremely quickly to look rational according to traditional models used by financial analysts. That means he’s worried many retail investors may be setting themselves up for big losses in their zeal to ride the meme-stock wave.

And he acknowledges that even if brokerages do offer more warnings, that may not be enough to stop some traders, as social media posts continue to encourage them to pile into certain stocks, and given human nature.

“As much as I believe in consumer protection,” Coffee said, “I believe a fool and his money are parted.”