Meme stocks hitting the rocks as chat room investors get fried

Arrogance and ignorance are an awful combination in any walk of life – but with investing, they become ruinous. That reality is playing out for millions of novice share market punters who jumped into US “meme stocks” with disastrous consequences. Meme stocks are listed equities whose underlying companies have poor fundamental and weak businesses whose share prices have been fuelled through social media chat rooms (mainly Reddit, Twitter and TikTok). From the South Sea Bubble in 1720 to the Dot Com Bust of 2000, fools and their money have always parted when financial parties end – as they always do. In the stock market the only sustainable fashion is the one rooted in growth and value. – Alec Hogg

By Bailey Lipschultz

(Bloomberg) – Retail investors who fuelled a basket of meme stocks to meteoric heights are getting pummelled by a risk-off environment and waning enthusiasm for their favourite high-flying stocks.

The group of 37 so-called meme stocks tracked by Bloomberg fell 0.5% on Monday, marking a sixth straight decline, after its worst week since late February. The basket’s longest losing streak since taking Wall Street by storm comes as the spread of the delta variant sparked concerns about the future of global economic growth.

The recent selloff signals the end of the latest chapter to the meme mania where amateur investors are faced with the reality of investing in companies tied to chatroom hype instead of fundamentals.

While investors who bought shares of AMC Entertainment Holdings Inc. and GameStop Corp. at the start of the year are sitting on massive gains, the same can’t be said for traders who piled into hot-then-not stocks such as Chamath Palihapitiya-backed Clover Health Investments Corp. and Hims & Hers Health Inc. With the latest unwind, top performers and cult favorites like AMC Entertainment have gone from leaders to laggards among the group.

AMC Entertainment has dropped 25% and GameStop is down 9.3% over the past six days, while Express Inc., Zomedica Corp., The9 Ltd are each down more than 15%.

Shares of GameStop, often seen as icon of retail trading, took a hit last week after a Bloomberg News report that Netflix Inc. was planning to expand into the video games business. The video-game retailer slumped as much as 5.7% amid concerns that another direct-to-consumer offering would lead to gamers simply download digital copies instead of heading to GameStop locations or shopping on their website.

While some were quick to downplay the risk, Wedbush analyst Michael Pachter said the video-streaming giant’s efforts are likely to be “all mobile,” GameStop shares were hit nonetheless and are trading near the lowest in two months.

AMC Entertainment remains the group’s best performing stock this year and has skyrocketed over 1,500%, nearly double the gains seen in GameStop. Despite the massive rally this year, the stock has shed nearly a fifth of its value in the past week alone and is at less than half of its all-time high reached last month. AMC rebounded to drop just 1% after initially stumbling as much as 11% Monday as the surge in Covid cases dragged reopening stocks lower.

Trading volume for AMC has dried up with 614 million shares changing hands last week, a far cry from the more than 2 billion seen in late May and early June. On the options front, trading of far out-of-the-money calls, something that helped fuel recent surges, have fallen by the wayside with total option volume sitting at roughly a quarter of the peak seen last month.

Millions of movie watchers have also been streaming new movies like “Black Widow” and “Space Jam 2” online, staying away from cinema theatres.

AMC’s bonds also lost steam in recent weeks along with shares, and were among the top decliners in the U.S. high-yield market on Monday. The company’s 12% notes due 2026 fell the most since February, dropping 5 cents on the dollar to around 85.5 cents, according to Trace bond trading data. Those notes were trading above par just last month.

The malaise is becoming increasingly visible for one-off meme stocks that see huge gains evaporate. Newegg Commerce has erased more than 60% of its value in less than two weeks after soaring 287% over three days.

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