"While the so-called ‘meme stock’ trend has cooled down, the conditions exist for it to continue into the future."

Quantitative Equity Analyst, Tom Shipp, LPL Financial Research

How should financial advisors address the meme stock phenomena with clients?

Masks. Remote workspaces. The disruption of routines. Binge-watching. The COVID-19 pandemic introduced change to the culture, but one trend that particularly impacted financial advisors and wealth management programs at financial institutions is meme stocks.

What is a meme stock?

According to Investopedia, a meme stock “refers to the shares of a company that have gained a cult-like following online and through social media platforms.” Within these platforms, the conversation can build hype around the stock and influence its price.

At the height of the pandemic, between baking bread and waiting for new TV episodes to drop, some individual investors on social media platforms caused stock prices of individual companies to surge for the short-term. This activity added more uncertainty to markets that were already volatile. In 2021, GameStop and AMC Entertainment garnered the meme-stock headlines, with dramatic fluctuations over a short period of time. Because social media conversations help spark these stock rallies, investors may have the opportunity to participate before the larger market catches on. Investors may also be using these non-mainstream channels to influence unsophisticated investors without necessarily disclosing their relationship to the stock (like their ownership stake) required for financial professionals.

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Quantitative Research from Bloomberg Intelligence found that a basket of stocks that had high “meme stock” characteristics underperformed a basket of stocks with low “meme stock” characteristics, as well as the overall equity market, since 2010. The basket of “meme” stocks in the analysis had cumulative returns of ~11% in the study period, compared to ~355% for stocks with low “meme” stocks characteristics, and ~275% for the US equity market, measured by the Russell 3000 index. See the chart above. The analysis combined two characteristics to define the “meme factor”: near-term trading volume, measured by 20-day volume, and short-interest, or the % of a stock’s traded shares that have been sold short.

The result is, while exciting and fun for some, meme stock prices are unpredictable and are not always traded on traditional investment fundamentals, so gains can quickly turn into losses.

Are meme stocks here to stay?

The top meme stocks in 2022 included Bed Bath and Beyond, Blackberry, and Nokia*. While those meme stock rallies may not have been as big as those involving GameStop or AMC, meme stock activity does seem to be part of the market. But are they here to stay? As more people return to the office and their routines and have less time online, will the meme stock trend disappear?

“While the so-called ‘meme stock’ trend has cooled down, the conditions exist for it to continue into the future,” said Tom Shipp, quantitative equity analyst with LPL Financial Research. “From an investment perspective, our view is that speculative investments do not belong in a long term, goals-based investment portfolio.” 

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*What Are Meme Stocks, The Motley Fool, July 7, 2022

 

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