GameStop (GME) became a household name to investors long after it was a household name to young gamers who liked to play Call of Duty, Grand Theft Auto and EA Sports video games. In January 2021, the struggling and widely shorted stock experienced an almost unprecedented resurgence thanks to a Reddit message board-fueled short squeeze orchestrated by someone named Keith Gill, under his more public alias Roaring Kitty.
GME started 2021 at 4 per share (adjusted for a subsequent 4-for-1 split). On January 25, it reached a closing high of 81 per share. By mid-February, the stock was back down to 10 a share, though it did rally as high as 66 in March and to 62 in May. But the stock has never gotten back to its late-January 2021 highs, and currently trades at a mere 24 per share.
GME was the first so-called “meme stock,” and it wasn’t alone. AMC Entertainment (AMC), Blackberry (BB), Bed Bath & Beyond (which is no longer public after declaring bankruptcy in April 2023), and several silver miners and ETFs were among the original meme stocks, all launched in the midst of the Covid-19 pandemic and at the height of the subsequent bull market brought on by generous government stimulus checks and too much time spent online.
Now, a fresh batch of meme stocks is cropping up, which is a possible red flag for the market.
New Meme Stocks Emerging
Highly shorted stocks Opendoor Technologies (OPEN), Kohl’s (KSS), Krispy Kreme (DNUT), Beyond Meat (BYND), GoPro (GPRO) and 1-800-Flowers.com (FLWS) have all popped more than 25% this week, and in some cases much more. Kohl’s shares were up 37.6% on Tuesday alone thanks to the highest daily inflow from retail traders in nearly three years, according to data from Vanda Research.
The meme stock craze of 2021 was an early warning sign of a bear market, which arrived for the broad market the following year and for growth stocks (i.e., the Nasdaq) by November of that year. That doesn’t mean the market will suffer a similar fate this time around – meme stocks have had a few good days several times during the current rally, and yet the bull market marches on. But considering the market is at all-time highs despite an onslaught of potential headwinds (tariffs, still-high interest rates, political turmoil, major overseas conflicts, etc.), this new crop of meme stocks is at least a yellow flag. The longer it lasts, the more ominous it becomes.
For now, the market is in fine shape. New tariff deals are being announced, including key ones with Japan, Indonesia and the Philippines in just the last few days. Volatility remains low. Second-quarter earnings season is off to a decent start. And concerns about the economy have mostly faded, or at least been put on hold.
As I wrote last week in this space, I do think a 5% market pullback (or more) is coming in the next two months, likely during the first couple weeks of September, per recent tradition. But while several sectors (information technology, communication services, utilities) are “priced for perfection,” many other sectors are undervalued, behaving “like it’s still April,” as my colleague Tom Hutchinson smartly put it. Those include the real estate sector (-17% off the highs), healthcare stocks (-13%), energy stocks (-11%), materials stocks (-6%) and retail stocks (-5%). Small caps as a group, meanwhile, still trade 7% below their 2021 peak, as measured by the Russell 2000.
Bottom line: there’s plenty of value still out there, and this week’s sudden meme stock surge is a sign that growth is getting a bit frothy. Best to stick to undervalued stocks, and to give the new meme stocks a very wide berth.
And if you need help identifying which value stocks to buy, I have a portfolio full of them in my Cabot Value Investor newsletter.
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