If you didn’t get burned investing in GameStop (NYSE: GME) back in 2021… don’t fret. You’ve got another chance now.
Unfortunately, the so-called “meme” stock is back. It’s up a whopping 350% in May so far.
If that sounds appealing, consider that the stock soared more than 2,000% in January of 2021 – only to lose 87% of its value over the next three years.
But you might ask, “Why would investors bid up the price of this slowly failing retail outlet that still sells physical copies of games on discs as gamers migrate to digital downloads, sending its annual revenue lower almost every year?”
Because of Roaring Kitty, of course.
Yes, it sounds absurd, but that’s’ the online moniker of financial analyst Keith Gill, who pumped up the stock in online boards and created a sort of frenzy for it among retail investors.
He did that in 2021, and it seems he’s back. That has reignited interest among investors who chase meme stocks(which you could define as companies that have a cult-like following on social media… and not much else going for them).
Here’s a five-year chart of GameStop…
You can see how in 2021, Gill helped inflate the stock from around $4 a share to more than $81 nearly overnight. And now his reemergence has sent the stock from around $17 to $49 this week.
It’s almost certain this recent frenzy will also fade away – and the stock’s recent gains will evaporate as quickly as they emerged.
So it goes without saying that buying GameStop now is a great way to lose money.
More Memes
Other meme stocks are back with a vengeance, too.. Even a few new ones have emerged.
Remember when AMC Entertainment (NYSE: AMC) was nearly taken out by the pandemic, quintessentially revived, only to fall from grace again? Well now the stock is up 135% this week.
And here’s a new one for you: Trump Media & Technology Group (Nasdaq: DJT).
The stock started trading in March of this year when it merged with a special purpose acquisition company (SPAC). Investor enthusiasm for the company – perhaps related to enthusiasm for majority-owning shareholder Donald Trump – sent the stock soaring on its first day and put its market cap at almost $10 billion.
But much like GameStop, the company’s fundamentals couldn’t justify that valuation. Analysts estimated that Trump Media generated just $5 million in revenue in 2023, putting its price-to-sales ratio at nearly 2,000.
To put that in perspective, here’s how that compares to the ratios of some stocks in the Magnificent Seven….
Trump Media’s share price has fallen 25% since that first trading day, and it seems unlikely to regain its early peak.
Finally, there’s one meme stock that’s definitely not coming back: Hometown International.
Frenzied retail investors bid the stock’s market cap up to $100 million in early 2021, yet the company’s assets consisted of a single, money-losing deli in New Jersey – with revenue of less than $40,000 in 2019 and 2020, combined.
Late last year a North Carolina ex-convictpleaded guiltyto securities fraud for manipulating the stock to mislead investors and artificially inflate its price
Fundamentals
The lesson here: Don’t consider a stock’s popularity or social media presence when investing.
Do these instead…
- Avoid recklessly speculative investments. This includes SPACs, meme stocks and most cryptos. And keep in mind, The Oxford Club has a rule that no investment should have more than 4% of your portfolio.
- Seek quality investments. That means companies with robust and growing sales and earnings, strong management and, if possible, a moat around their business. Our strategists and team of analysts spend countless hours doing research to identify just such companies.
- Diversify. Invest in small caps and large caps, growth stocks, value stocks and international stocks.
- Run trailing stops. They protect your profits and good time and your principal in difficult times.
And finally, consider investing in companies associated with the eight technology megatrends that Alexander Green and I identified in the January issue of The Oxford Communiqué. They will give you multiple ways to earn megaprofits in the months and years ahead.