What are meme stocks & why should you care?

Equities
Investments

The power of social media sentiment over stock prices is rapidly strengthening. The meme stocks are rising. Unsure of what they actually are? Here’s a look at what meme stocks are and whether they’re worth investing in. 

What are meme stocks? 

Meme stocks: the background 

Whether you like it or not, we live in an age dominated by social media. Instagram; Twitter; Facebook; Reddit; whatever the platform, you go there, and you’ll find memes aplenty. 

Memes are basically images or videos that go viral. Going viral is the key here. With millions of users, the power of social media in spreading information and instigating trends is massive. Whether that’s the latest funny cat video, a trend like planking, or sending certain stocks to the moon, memes are common social currency these days. 

So, where do stocks fit in? Meme stocks, also playfully called stonks, are basically stocks that are popular with Millennial investors. They trade more on hype rather than their underlying fundamentals.  

Did you get caught up in the GameStop frenzy? This is the perfect example of meme stocks in action. For those unfamiliar, investors operating out of the /r/Wallstreetbets forum on Reddit backed GameStop heavily, sending its price to the moon, before shorting the stock. Other stocks given the Reddit touch include AMC and American Airlines. 

Beyond Reddit and Twitter, those investing in stonks might also use Stocktwits, a Twitter-like platform devoted entirely to stocks. Online investor communities have millions of members. The now infamous /r/Wallstreetbets has over 9.4m subscribers – known by themselves as ‘degenerates’.  

As well as pure stocks, ETFs are emerging around the stonk space. The recently launched VanEck Vectors Social Sentiment ETF, listed on the NYSE under the BUZZ ticker, is the most prominent example. BUZZ will reportedly use an algorithm based around finding the 75 large-cap stock names that are getting the most positive discussion on the internet, principally on social media like Twitter, Reddit and so on. All companies in the ETF must have a market cap of $5bn. 

So why should you care? The GameStop experience in January showed how investing is changing amongst younger age groups. One of the main drivers for these investors was to try and instigate a big change in the whole culture of investing and trading. More cynical observers may say it was instigated to try and take advantage of Millennial naivety, but it’s unlikely that such a frenzy will happen in the way it did with GameStop stocks.  

But January 2021’s events showed how social media is shaping the way people trade and invest, and the stocks they choose to trade and invest in. That makes meme stocks a very interesting phenomenon to observe going forward. 

Should you invest in meme stocks? 

That is the big question. 

If you want to invest in meme stocks, you should be aware of their common characteristics. As mentioned earlier, they tend to be popular with the younger, Millennial investor crowd: tech-savvy investors who rely on social media platforms to find the latest tips.  

Stonks – as meme stocks are referred to sometimes – tend to be very volatile: one second, they could be soaring, the next they’re crashing back to earth. Their valuations aren’t based around fundamentals, more a collective belief in ramping them up. Looking to the future is a key part of Millennial investors’ strategies. Fear of missing out (FOMO) is also a key driver, hence why so many people hopped aboard the GameStop rocket ride. Panic selling at even the slightest headwind is a prevailing trend, which only adds to meme stock volatility.  

The risks of trading or investing in meme stocks can be very high as a result. It’s always advised any traders or investors look into doing proper research and analysis before committing any capital when picking stocks. 

But that doesn’t necessarily mean all meme stocks are pariahs worth avoiding. Some may have actual potential, whether through a visionary CEO, being at the forefront of a new industry like companies listed in ARK innovation ETFs, or at the forefront of a megatrend about to go viral worldwide.  

The trick is identifying what is pure hype and which stocks may actually have potential beyond meme status. For instance, GameStop’s rally is partly driven by an attack on the whole system of short selling, and millennial nostalgia for a company that may have had a lot of significance to them growing up, rather than good financial performance and a solid business model.  

If you do want to invest in meme stocks, then it must be stressed again there are high risks and major price volatility here. Investing in stonks may not be for the inexperienced, despite attempts by apps like Robinhood to “democratize finance”. Please do careful analysis and research before trading or investing. 

Are there any meme stocks you should watch? 

Nasdaq has identified some meme stocks it believes could offer solid returns. Whether they do or not remains to be seen, but these could be solid additions to your portfolio, should the meme momentum continue. 

Nokia 

Remember the bulletproof brick of a phone the 3310? Nokia used to be king of the mobile phone world with phones that could seemingly withstand an apocalypse scale event. The transition to smartphones hasn’t been very healthy for Nokia, but due to huge brand recognition from its glory days, and unintended US governmental boosts in an effort to curb Chinese phone maker Huawei, have given Nokia stock a bit of a boost. 

In January, NOK rose from $4.00 to topping at $6.50, although they have subsequently fallen back to $4.00. Its latest earnings report saw Nokia beat expectations, so the telecoms company may be one to watch in other quarters this year. 

Sundial Growers  

Cannabis stocks have been growing in popularity recently as its expected Joe Biden’s White House may push ahead with federal decriminalisation legislature during his four-year presidential tenure. While other more mainstream stocks like Tilray or Canopy entice traditional investors, meme stock buyers are looking to cannabis penny stocks to get their investment fix. 

Sundial Growers is one of these. While it’s high of $1.30 per share may be seen as overpriced, the company is undergoing a shift from low-margin wholesaler supplier to high-margin retail firm. The Canadian company could be one the watch for stonkers if it can pull off its transformation.  

Palantir 

Palantir and its many links to the Biden Administration have investors hoping to benefit from a solid four years for the data analytics firm.  

High revenue growth in the last quarter and better earnings have outlined why meme stock investors are looking to Palantir. If it continues to have a healthy relationship with the White House and other governments, revenues should stay strong, thus the Palantir share price should stay strong too.  

The company is looking to expand its retail offering, as most of its clients now are government bodies. If it does so, but fails to meet earnings expectations in this new direction, its meme stock shine might be tarnished. But with governments increasingly capturing and sifting through citizens’ data, Palantir may have a solid future ahead. 

Naked Brand Group 

Struggling retailers are a target for stonks investors and Naked is no different. The group is currently not doing well in the bricks-and-mortar space, so it’s winding down its physical retail side to concentrate purely on e-commerce.  

However, its current market cap of $81m makes it a bit of a small fry in the online retail world. Last year, it generated sales of $54.7m: a pittance against some of the major e-commerce giants. But it’s still very early days, and if it can grow with its renewed focus on digital, Naked could be a stock to watch. For some investors, it’s more of a gamble than others, but that is par the course for those investing in meme stocks. 

Churchill Capital Group 

Some meme stocks are part of industries looking to change the world. Electric vehicles is one of these. We’ve all seen the rapid rise of Tesla for instance. Other EV makers are trying to establish themselves before traditional car brands step up their own electric efforts. 

Churchill Capital Group is eyeing up an acquisition for luxury EV brand Lucid Motors with the aim of turning it into a Tesla competitor. A tall order, given Tesla’s head start, but as electric vehicles become the norm, Lucid Motors could establish itself as a key player. Its $69,900 Lucid Air model is already substantially cheaper than the equivalent Tesla Model S, but still sits in the same high-end sedan space. 

This deal is yet to be concrete, but CCPG is getting heavy backing from the Saudi sovereign wealth fund, which shows its Lucid ambitions might not just be the stuff of dreams. As a result, the stock is on meme stock investors’ hotlist.