On May 13th, Keith Gill, known as “Roaring Kitty,” hinted at a return on social media platform X, causing Meme stocks GameStop (GME) to trigger circuit breakers at least six times, ultimately closing up 74%. AMC Theatres (AMC) also saw a dramatic increase, closing up 78.4%.

“Meme stocks” refer to stocks that gain massive attention through social media and experience significant price volatility due to online discussions. The valuation of these stocks is not entirely based on the company’s fundamentals or financial performance but rather driven by collective buying or selling actions of retail investors.

With the recent resurgence of Meme stocks, it’s reminiscent of the 2021 retail investor versus institutional investor saga. This article will revisit classic Meme stock cases, compare recent extraordinary surges, and analyze the opportunities and risks of investing in Meme stocks.

The 2021 Classic Meme Stocks Case: Retail Investors vs. Wall Street

Wall Street’s Shorting Strategy

GameStop, a retailer primarily selling video games and related products, faced long-term operational difficulties due to the rise of digital gaming and the decline of physical store sales. Many hedge funds and institutional investors bet against its future, making GameStop one of the most shorted stocks in the U.S. market by the end of 2020.

Keith Gill’s Bullish Stance

Simultaneously, in the Reddit investment community WallstreetBets, led by Keith Gill, users began discussing GameStop, believing its stock was significantly undervalued. Gill provided detailed financial analysis and investment logic in his videos and posts, explaining his belief that under new management and a transformational strategy, GameStop’s stock price would rise. He pointed out the extreme level of shorting, suggesting a potential “short squeeze.”

Retail Investor Frenzy

In January 2021, as more retail investors bought GME on platforms like Robinhood, GameStop’s stock price skyrocketed from around $20 to over $480 within weeks. The soaring prices forced short sellers to buy back shares at higher prices to limit losses, further driving up the stock price.

Alongside GameStop, AMC Theatres also became a famous Meme stock, with others like Koss Corporation (KOSS) and BlackBerry (BB) experiencing significant volatility due to social media influence.

The Decline

On January 28, 2021, Robinhood and other trading platforms restricted users from purchasing GME and other Meme stocks. The U.S. Securities and Exchange Commission (SEC) and other regulatory bodies began investigating the events for potential market manipulation. As the frenzy subsided, GameStop and other Meme stocks started to decline in February.

The Second Wave

In June 2021, Reddit-fueled stocks surged again, this time led by AMC Theatres, which also drove other Meme stocks upwards. However, the rally was short-lived, and Meme stocks soon began to decline again. Keith Gill disappeared from social media after June 2021.

2021 vs. 2024 Meme Stocks Surge

Since Keith Gill’s return to X, GME surged 271.3% in just two trading days, and AMC rose 135%. Despite the impressive surge, the gains were short-lived, with GameStop and others giving back most of the increases. This decline was partly due to AMC’s strategic move to capitalize on the surge by issuing 23.3 million shares to exchange for notes due in 2026, reducing its debt. GameStop followed by announcing the issuance of 45 million A-class shares, contradicting the clean balance sheet narrative touted by its loyal fans.

Consequently, retail investor interest in GME and AMC diminished significantly. As of this writing, both stocks are on a downward trend, with GME slightly up on the 20th but down 24.01% over the past five trading days.

Investment Strategies During the Meme Stocks Frenzy

In this Meme stock wave, both bullish and bearish investors face potential losses. However, former PIMCO CIO “Bond King” Bill Gross adopted a “straddle” strategy to profit.

A straddle is an options trading strategy involving buying both a call and a put option with the same strike price and expiration date. This strategy is common in speculative markets with expected high volatility but uncertain price direction.

Bill Gross’s core strategy involved selling GME and AMC call and put options, betting that the stocks would trade within a range rather than trending in one direction, earning $22 per straddle.

Risks of Investing in Meme Stocks

While seasoned traders might emulate Bill Gross’s strategy, novice investors must recognize two major risks before buying Meme stocks:

High Volatility

Meme stocks are driven by investor sentiment and speculative behavior, leading to extreme short-term price fluctuations. Predicting price movements is challenging. Shorting Meme stocks can lead to unlimited losses if prices soar, while collective retail buying can trigger short squeezes, causing significant losses for short sellers.

Lack of Fundamental Support

Meme stock prices often disconnect from company fundamentals, such as profitability and business outlook, relying more on market sentiment and hype. Prices can be severely overvalued, and when market sentiment shifts or hype fades, they can plummet. Additionally, coordinated actions on social media may manipulate stock prices, posing legal and regulatory risks. Investors need to be cautious.

Managing Risks and Investing Wisely

Investors considering Meme stocks should fully understand these risks, remain calm and rational, avoid being swayed by market sentiment, and employ appropriate risk management measures, such as setting stop-loss points, avoiding blind following, and diversifying investments. Doo Prime offers over 10,000 trading instruments to help you build a diversified investment portfolio and manage various investment risks.

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