Meme stocks like AMC, Peloton & Co. on the rise again: That’s what’s behind it

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• Meme stocks soar
• Multiple reasons for junk rally
• Analysts do not see a sustainable recovery

So-called “meme stocks” came into investor focus in early 2021, when a short-selling war broke out between hedge funds, which speculated on falling prices at individual ailing companies, and private investors, who organized themselves via Reddit and other Internet forums. Either to combat the short sellers or simply out of fear of missing out on temporary price increases, they have invested heavily in these stocks, whose valuations have been so artificially inflated. This was followed by a phase of disillusionment – paired with sometimes immense losses.

But these gambling papers are currently enjoying growing popularity again. For example, the shares in the cinema chain AMC have climbed by an enormous 52.33 percent since the beginning of the year and those in the sports equipment manufacturer Peloton by as much as 59.95 percent. For comparison: The S&P500, which reflects the broad US stock market, rose only 3.4 percent over the same period (as of closing prices on 02/24/2023).

That’s why meme stocks are rising again

Amy Wu Silverman, equities strategist at the Royal Bank of Canada (RBC), told Yahoo Finance that there were several reasons for the strong performance of junk stocks (trash stocks): On the one hand, some investors initially sold their shares to post losses for tax reasons. Now they would buy the shares again this year. On the other hand, the momentum has shifted. The third reason she gave was that small investors would now increasingly buy call options again for some stocks that had been favorites during the pandemic.

Junk stocks, according to RBC, are characterized by a net loss and a net debt. They also show negative free cash flow both now and in the past year.

The rally in meme stocks coincides with tremendous stock activity from retail investors. According to Vanda Research, the flow of money from small investors into the US stock market climbed to a record high in January.

Pessimistic Analysts

Still, various analysts are rather pessimistic about the future prospects of meme stocks. As Wu Silverman explained, these papers suffered badly in 2022 from the expiring stimulus. And even if they are currently making strong gains again, the fundamentals would not have changed. “They are still inferior names in an adverse environment,” said the expert.

At their last meeting, the US monetary authorities did not talk about an interest rate pause, as market participants had hoped. In fact, central bank chief Jerome Powell has recently again announced further interest rate hikes. As a rule, interest rate hikes hit growth stocks particularly hard because they are usually more heavily leveraged.

Like Wu Silverman, Jim Smigiel sees no fundamental reasons for the enormous gains in meme prices since the turn of the year. The chief investment officer at SEI Investments Co. has dubbed the current trend a “junk rally,” with the lowest-quality stocks performing best. “It really feels like we’re back in the days of meme stocks, but the difference in macroeconomic background couldn’t be greater,” he is quoted as saying by “Finanzmarktwelt”. For example, the meme rally during the coronavirus pandemic came at a time when the market was being bolstered by huge stimulus programs and interest rates were at record lows, while interest rates have since risen sharply and economists are warning of a possible recession. “This is massive speculation that will quickly fizzle out because there are no fundamental reasons for it,” Smigiel warned.

According to “Finanzmarktwelt”, Irene Tunkel sees it similarly: “We are in a narrow time window in which inflation fears are easing, but we have not yet dealt with the slowdown in growth,” says the chief strategist for US equity strategies at BCA Research . “Unprofitable and other risky companies are the prime candidates for a recovery in this window, but this speculative exuberance is not a sustainable recovery.”

Editorial office finanzen.net

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