Meme stocks refers to companies that have been made popular via internet chat forums, where groups of retail traders band together. Most of these firms are struggling, with large investors aiming to profit by shorting the stock. If enough buyers can rush in and support the share price, it can result in a large, quick move higher. This is known as a short squeeze. Here are some examples that are popping right now.
An aggressive short squeeze
One of the most prolific cases last week was Bed Bath & Beyond (NASDAQ:BBBY). The US retailer has struggled to perform recently, with the share price down 58% over the past year. In fact, a month ago the share price was hovering around $5.50. There was large short interest, which means that a lot of investors were betting the price would fall further.
However, a large retail buying push caused a sharp price movement higher. With short sellers urgently having to buy back the shares, this propelled the share price even higher still. It topped out around $27 last Wednesday, representing a five-fold return in one month.
Plenty to smile about
SmileDirectClub (NASDAQ:SDC) is another example of a big mover recently. The company specialises in clear aligners and similar dentistry products. Even with the share price being down 66% over the past year, it still commands a market capitalisation of $219m, showing that this isn’t a small penny stock.
Unfortunately, revenue has fallen over the past couple of years, pushing the business into making losses. It’s the same case as Bed, Bath & Beyond, in that long-term investors think that the situation is only going to get worse.
A month ago, shares were trading around $1. It traded up to $2.19 last Tuesday, before coming lower. This return of over 100% was fuelled in part by chat forums and social media, with many jumping on the bandwagon as the price rose.
Risk and reward with meme stocks
I did hear about the move on Bed Bath & Beyond a couple of weeks ago, before it peaked. I decided against investing for a few reasons.
With meme stocks, it’s always a short-term play with a race to the top and then a sharp fall straight afterwards. I simply don’t know if I’m going to buy at the top, and be left holding a heavy loss. For example, on Friday the Bed Bath & Beyond price dropped 40%!
Most of these businesses are struggling financially. So the fundamental value is probably less than the inflated price they’re changing hands at.
There’s obviously a clear reward for people who get it right. Doubling my money in a few weeks is something that no one can turn their noses up at.
My investment philosophy is geared around long-term investing, so ideas with a lifespan of a few days or weeks aren’t really what I’m looking for. I also feel the risk associated with both stocks is too high for my liking. So with the two above examples, I’m happy to sit and watch from the sidelines.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.