Ray David from Schroders Bank is shorting Australian equities that become meme stocks, making money off a movement that he deems unhealthy for markets. Video / NZ Herald
A new class of meme stocks has sprung up during the stock market’s surprise recent rally, raising concerns about investors’ willingness to take on bigger risks amid a still uncertain economy.
Meme stocks are typically weak companies on the verge of failing, but that still manage to garner attention fromindividual investors willing to take on risky bets and drive the stock price higher.
Two years ago, the video game retailer GameStop and movie theater operator AMC Entertainment made a big splash with individual investors in a frenzy that caught the attention of regulators and Congress.
The enthusiasm over meme stocks can seem nonsensical.
Late last month, reports said the trucking giant Yellow Corp was shutting its operations and heading for bankruptcy. Investors took the news as a green light to jump in, pushing Yellow’s stock from 71 cents to more than $3.50, even though holders of common stock typically get wiped out in a bankruptcy.
The company filed a Chapter 11 petition Sunday, yet the shares are still trading around $2.50 on Monday.
Tupperware warned investors earlier this year that it was having trouble staying afloat and might be delisted.
Investors in recent weeks drove the value of the stock up more than five-fold ahead of a restructuring announcement from the company on August 3. The stock has catapulted to $5.22 from roughly 74 cents in early July.
The recent run-up in meme stocks could leave investors hurting. The broader market seems to be in a transition to focusing on more fundamental aspects of companies that signal potential for growth and value, rather than short-term trading, said Mark Hackett, chief of investment research at Nationwide.
“You just kind of run out of steam and there’s only so much an aggressive retail investor can do to sustain a company from a disadvantaged perspective,” he said.
“That’s going to leave some companies in the dust.”
Tupperware warned investors earlier this year it was having trouble keeping a lid on losses and staying afloat . Photo / AP
The recent rallies, which include meme veteran Rite Aid, are reminiscent of the 2021 rally that prompted Robinhood and other retail brokerages to take steps to tamp down the speculative frenzy. Bed Bath & Beyond was also part of the meme craze, but unlike GameStop and AMC, it ended up in bankruptcy.
The message board Reddit has remained a popular place for individual investors encouraging each other to buy such stocks.
In one such recent exchange, a user congratulated those who had been buying Yellow amid grumblings about its demise, at one point saying “a few years from now, you’ll be looking at a much more well run business.”
Yellow said Sunday that it will liquidate and warned investors in a securities filing that shareholders face a potential total loss, depending on the outcome of the bankruptcy.
