Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explains what retail investors should know as the “meme stock” movement continues to thrive. 

The key to success is to understand the motivations behind emotional investing and to avoid both euphoric and depressive investment traps that can lead to bad decisions. The investor psyche can overpower rational thinking during times of stress, whether the stress is caused by hype or panic. To capitalise on market euphoria or frightening events, it is critical to take a rational, realistic, and strategic approach to investing.

With this topic in mind, below I explore the rise of the “meme stocks” movement, and whether investors should look to capitalise on this growing trend or steer clear of impulse buys. 

What is the "meme stocks” movement?

“Meme stocks” are stocks of companies that have recently seen a sudden surge in trading activity, usually supported by online social media platforms such as Reddit and Twitter. The hype surrounding a particular stock encourages retail traders to invest, knowing that its share price will likely rise and do so quickly. In addition, the “meme stocks” exchange community often favours stocks with high, short-term gains. By forcing everyone who sold the stock to cover their short position, this leads to further stock growth overall.

The term “meme stock” originated on the Reddit online discussion forum, where a sub-Reddit known as WallStreetBets became heavily popular. Towards the end of January, the users of WallStreetBets criticised large financial institutions and hedge funds for constantly 'shorting' the shares of distressed companies such as GameStop and AMC Entertainment. This led to retail traders buying large quantities of shares in these companies, taking advantage of the ‘buy and hold' approach.

Following this surge, news of the short squeeze spread across various social media platforms, attracting a lot of attention from investors across the globe, even to the point where the phenomenon came to the attention of the SEC. This resulted in certain hedge funds and brokers who worked with them making some pretty hefty losses.

Should investors look to participate in this growing trend? Or is it important that they do not get sucked in by impulse buys?

It is important to remember that “meme stocks” are nothing more than speculation. Essentially, it is not worth allocating large sums to these trades, given the stock's volatile behaviour or unsubstantiated valuations backed only by information noise. In the long term, the company fundamentals will matter a lot, and after a short squeeze rally, the prices can easily go down as fast as they went up, so it is worth acting with caution and being aware of all the risks.

Has the "meme stocks" movement impacted the global stock market as a whole?

The movement of “meme stocks” has more to do with factors brought about by the pandemic. Historically low interest rates and incentives, as well as high levels of liquidity in the markets, combined with increased leisure time and self-isolation, provoked many people to enter the stock market for the first time. In addition, the increasing availability of zero commission accounts and trading apps for millennials contributed immensely to the growing trend. 

Over one million new online brokerage accounts were opened in Q1 2020 alone, with equity trading becoming one of the most popular applications for Covid's incentive cheques in the US. Yet, the retail investment boom is not unique to the US. Almost all major stock markets have seen similar trends, with local trading applications becoming more widespread. 

What does the future hold for meme stocks? Will the movement last?

The future of the “meme stocks” movement will depend on the fundamental reasons for its emergence in the first place, including liquidity levels in the markets, interest rates, and monetary policy. Without these components, the rise of “meme stocks” might have never happened in the first place. As such, while it is likely that this theme will continue to exist, it will not move at such an incredible scale as in January with Gamestop and AMC stocks.

What are the top five “meme stocks” to watch out for in 2021?

While it is clear that investors should avoid impulse buys, with the right level of research and precaution “meme stocks” can result in profits for more experienced buyers. So, what are the top “meme stocks” that investors should watch in 2021?

  1. Through its subsidiaries, Alibaba Group Holding Limited (BABA) provides technology infrastructure and marketing opportunities for merchants, brands, retailers, and other businesses to engage with users and customers. It operates in four segments: Core Commerce, Cloud Computing, Digital Media and Entertainment, and Innovation Initiatives. It is sitting at about 72% upside to the average target price of $246.

  2. ContextLogic Inc. (WISH) operates as a mobile e-commerce company in Europe, North America, South America, and other areas across the globe. The company operates Wish, a platform that connects users with merchants. It also provides marketplace and logistics services to sellers. The company was incorporated in 2010, at about 92% upside to its average target price of $9.2.

  3. Palantir (PLTR) is a software developer that specialises in big-data analytics. The company recently announced that the US Army's Intelligence Systems and Analytics Program Manager has selected PLTR to provide the data framework and analytical foundation for the Capability Drop 2 (CD-2) program. As a result, the software firm has been selected to advance the next phase of the Army's $823 million indefinite-delivery contract, with an approximate 23% upside to the maximum target price of $31.

  4. PubMatic (PUBM) provides a cloud infrastructure platform for digital advertising that enables real-time advertising transactions. The company was founded in 2006 and today operates 14 offices and eight data centres around the world, at about 97% upside to its average target price of $46.

  5. NIO Inc. (NIO) designs, develops, manufactures and sells intelligent electric vehicles in China. The company offers five, six, and seven-seat electric SUVs, as well as smart electric sedans. It also provides energy carriers and service packages to its users; marketing, design and technology development activities; production of electronic powertrains, batteries and components; and sales management and after-sales service activities, at about 88% upside to the average target price of $63.8.