Meme Stocks: Mother of all Crashes?

What started out as lazy photoshopped images of bug-eyed kittens alongside captions like “BEFORE COFFEE AFTER COFFEE” has transformed into the de facto language of social media. Every thought regarding politics, religion, mental health or basically any topic a snarky kid in their bedroom can come up with a minute of distracted brain power, has boiled every serious thought and consideration into a photo and a caption.

But most substantially, memes have wildly changed investing.

It’s also set a dangerous precedent for stocks, SPACS, cryptocurrencies, NFTs and the market at large. As far as meme investing goes, the cracks have already turned into chasms.

Rise of the Memes

The first major meme stock to hit was Gamestop (NYSE: GME). I’m not sure if you’ve ever visited a GameStop yourself, but let me tell you – it would inspire exactly zero confidence as a profitable investment. I’d stop by occasionally to buy a game for my children and was always met with the same dismal scene: a couple of pimply kids selling $60 games for pennies on the dollar, a pile of plush toys littered about like garbage and a sleeping guy behind the counter dreaming about how he still had a job.

Before last year it was a heavily shorted stock and no serious analyst would be putting it on their buy radar. At the beginning of January 2021, GME traded for $4.27. Then something amazing happened…

By January 25th, the stock was trading for $80.25! That’s over 1770% in just a few weeks on absolutely no positive news coming from the company.

What in the hell happened?

Memes happened. Reddit forum r/wallstreetbets had mobilized its millions of users to buy the stock in unison in order to force all of those short sellers out of their bids. With a few snarky posts in a chatroom, r/wallstreetbets had blasted the stock – to use their lingo – “to the moon”!

The plan worked, and a few shrewd investors became millionaires overnight. The shorts, well, lost their shorts. But the rest of the meme stock flock were left holding the bag. But reality has begun to set in. Today GameStop (NYSE: GME) trades at around $25.00. They’ve shed 50% in the past year alone.

Gamestop’s Q2 sales have dropped yet again, and their losses have almost doubled from last year.

Here’s where it gets even shadier for all of those retail investors who bought into the hype. A class action lawsuit has been filed against GameStop Chairman Ryan Cohen, who is accused of artificially inflating another company's value through a “pump and dump” scheme that may have enriched his firm RC Ventures by $68 million.

The company in question? Another meme stock: Bed Bath and Beyond (NASDAQ: BBBY).

Now, it’s about to get really dark…

The Dark Underbelly

Bed Bath and Beyond (NASDAQ: BBBY) stock also got the r/wallstreetbets treatment. Like GameStop, Bed Bath and Beyond was another moribund company with little hope and a ton of short interest.

In March of 2020 BBBY stock had hit a low of $3.28. By January 2021, after another “to the moon” meme blast, BBBY had rocketed to almost $54.00 – another quadruple digit gain with no basis in reality.

Today the shares sell for eight bucks and are likely heading much, much lower.

One reason for that is the other man cited in Cohen’s “pump and dump” lawsuit: Bed Bath and Beyond CFO Gustavo Arnal.

This week, Arnal jumped to his death from the 18th floor of a New York skyscraper.

Like Cohen, Arnal unloaded shares in mid-August, right before the company announced that it would close 150 stores and lay off a huge swath of workers. Arnal’s 55,013 shares amounted to about $1.4 million.

Not only does this look like clear insider trading, but it may never have happened had it not been so lucrative thanks to meme stock shenanigans.

Now, these are obviously tragically personal and public events. But it does put the freewheeling meme stock market into a little more perspective. While a few people do get rich during these outrageously volatile stock rides, the facts behind the scenes do not match the fervor.

I don’t envy the management, the accountants or the investment relations officers in their harried attempt to justify their soaring stock prices while knowing their business isn’t worth anything close to that. I could certainly see why major shareholders would use the factual information they know to get out with buckets of money before the ship sinks.

But tell that to the retail investor who got caught up in the hype and sunk hard earned money into mere smoke-and-mirrors. These tales of lies and deceit should hopefully serve as a wake up call for anyone who thinks they’re going “to the moon” by voting for the emperor with no clothes.

There had to be a reckoning coming, and one man has been sounding this alarm for over a year now…

Meme Stock Bear Market

Famed investor Michael Burry knows a thing or two about bubbles. He’s the man who placed a billion-dollar bet against the housing market bubble and was immortalized in “The Big Short”.

Burry has been warning about the implosion in meme stocks since last summer, when he wrote that the “mother of all crashes” was coming and the stock market was “standing on the knife’s edge.”

Ironically enough, Burry went to Twitter this week to vindicate his past prediction:

While the dot-com bubble, the housing bubble and the meme bubble have their differences, all bubbles have one thing in common: irrational exuberance.

I can’t think of anything more irrational than plunking down money for a lottery ticket sold by a mad crowd of keyboard warriors.

Another thing bubbles have in common is ruin and wreckage for those who waited around a little too long. Thousands of investors were sitting on incredible gains in companies like GameStop and Bed Bath and Beyond, but just got greedy as they waited for it to “go to the moon.”

Pack up the Circus

This entire ordeal reminds me of a trip I took to Las Vegas years ago. My friends and I hoofed it down the strip to “Circus Circus”, perhaps the most lowbrow casino on the Vegas Strip. It looked so silly that we had to take a peek for ourselves.

Inside we found children running amok as they watched trapeze artists, ate head-sized cotton candy and pumped quarter after quarter into video games. The parents that followed the frenzied kids ended up becoming frenzied themselves.

We observed said parents hanging their heads over rounds of losing blackjack hands. The craps table was filled with gamblers believing that the next winning roll would make up for the previous five losing ones. I sat in horror as a grown man audibly wept after pushing all his remaining chips on 27 at the roulette table, only to see the pill drop on 0.

The whole meme investing realm reminds me of a circus. More so, it reminds me of a casino. While investors are chasing shiny trinkets and pouring their hard earned money into a fantasy of riches and rewards, they’ve forgotten one thing: the house always wins.

Bet on companies with solid financials, long-term dividends and trustworthy leadership.

Don’t bet on a trip to the moon.

Godspeed,