What You Need To Know Now That Meme Stocks Are Back

The stock market is in the thick of another meme stock frenzy, sparked by Sunday night’s online return of one of the key figures of the 2020 and 2021 craze that sent GameStop ( GME ) shares to record highs.

GameStop has been one of the biggest winners of the frenzy this week, along with AMC Entertainment ( AMC ). Those and other meme stocks have shot higher following the online return Sunday of one of the prominent drivers of the earlier meme craze. Keith Gill , known by his online persona of “Roaring Kitty,” posted to X several times Sunday night through Tuesday afternoon after an extended hiatus, sharing a series of videos featuring quotes from famous movie and TV scenes nodding to his retreat from public life and recent return.

How It All Started In 2020

A number of retail investors, led by Gill and others, participated in the earlier meme stock craze on the belief that stocks such as GameStop and AMC had become undervalued because of perceived weaknesses in their business models. With the companies’ profits declining, a number of large hedge funds had taken up short positions on these companies, essentially betting that their business models would eventually fail.

Believing they could drive the value of the stocks higher by squeezing those short positions , Gill outlined a path in an August 2020 YouTube video that could send GameStop shares from $5 each to $50 or above. Gill and activist investor Ryan Cohen were key figures in motivating a community of online traders from the WallStreetBets subreddit to buy and hold shares of GameStop, running up their price.

OG Meme Stocks Still Below 2021 Highs

However, GameStop, AMC, and many other meme stocks weren’t able to sustain those levels for long and embarked on an extended retreat. Despite this week’s surge, they haven’t reclaimed their 2021 highs.

GameStop’s stock price has gained 179% over the past two sessions, though at $48.75 it’s still well below its record of more than $85 in January 2021.

AMC’s stock closed Tuesday at $6.85 and has risen 135% since Friday, but it’s a far cry from its all-time highs above $300 set in June 2021. AMC shares aren’t even close to their 52-week high.

In its first-quarter earnings report last week, AMC disclosed a net loss of $163.5 million as the theater chain works to recover from the large amounts of debt it took on to stay afloat during the pandemic.

GameStop, meanwhile, managed to post a full-year profit of $6.7 million for fiscal 2023, compared to a $313 million loss in fiscal 2022 after closing many of its stores.

What’s Different This Time

While AMC and GameStop saw a surge in activity to start the week, those inflows represented “just a fraction” of the sort of daily cash inflows that GameStop and AMC saw in early 2021, according to report from Vanda Securities Tuesday.

Vanda analysts also said that retail investors likely played a strong role in the inflows, writing “we think retail’s hand has been significant in pushing GME, AMC and other meme stocks higher Monday, and so far on Tuesday.”

However, they expressed doubt that the latest meme stock craze could reach 2021 levels in the days to come. “Do we think more retail traders can jump in on the trend in the coming days? Yes. Do we think this is a repeat of 2021? No, and the chances we reach that stage are low.”

Vanda also noted many hedge funds have learned from 2021 and are likely better prepared for short squeezes today.

What the Latest Craze Says About Investor Behavior

Despite inflation that has remained higher than the Federal Reserve has wanted, leading the central bank to keep interest rates at a 23-year high , retail investors don’t appear to be shying away from the stock market and other speculative investments.

Aside from this week’s meme stock rally, risk assets such as cryptocurrencies have also been on the rise this year, with the price of Bitcoin reaching record highs ahead of the fourth halving of the currency that took place last month.

What To Expect From Here

Vanda analysts wrote that they believe the most likely path could be that a number of hedge funds participate in a short squeeze of meme stocks, and exit their positions before the waves of retail traders sell their shares. That could mean the latest surge in stocks such GameStop and AMC could be shorter and reach less dramatic heights than in 2021.

Ihor Dusaniwsky of S3 Partners called GameStop a crowded and “very squeezable short,” in a Tuesday report, noting that while there will be a “significant amount” of GameStop and AMC short sellers that get squeezed out of their positions, a new wave could follow in behind them to short the current wave, especially considering both stocks eventually collapsed from their 2021 highs.