Meme stocks: What they are and why they’re making a comeback in 2024

Shares of GameStop soared more than 110 percent in early trading Monday after Keith Gill, who goes by Roaring Kitty on social media sites X and YouTube, posted for the first time in three years. Shares of other popular “meme stocks” such as movie theater chain AMC Entertainment were also higher, harkening back to the frenzied pandemic trading of 2020 and 2021.

Gill, who previously worked in marketing at an insurance firm, posted an image of a man leaning forward in his chair, a meme that is used by gamers to show that things are getting serious.

Here’s what meme stocks are and why they’re seeing renewed interest in 2024.

What are meme stocks?

So-called meme stocks first entered the investing landscape in early 2021, when individual investors targeted heavily shorted stocks with the hope of initiating a short squeeze, which can drive the stock price higher and higher as those who were short rush to buy and cover their positions.

Shares of GameStop went from around $3 to more than $120 in the span of a few months after Gill’s posts on the Reddit discussion group Wallstreetbets, where he goes by the username DeepF******Value. The posts are credited with sparking the GameStop rally and led to surges in the shares of other fundamentally troubled companies including AMC, BlackBerry, Bed, Bath & Beyond and more.

The hedge fund Melvin Capital, which was short GameStop shares, suffered massive losses and turned to other hedge funds for nearly $3 billion in financial support. The meme stock phenomenon ultimately led to congressional hearings and a movie was even made about the ordeal in 2023 called “Dumb Money.”

Meme stocks: Why they’re making a comeback in 2024

The exact reasons for why meme stocks are again on the rise in 2024 are hard to pinpoint. When the initial frenzy began in 2020 and 2021, people were largely at home due to the pandemic and had extra money due to government programs or just increased savings. For the most part, those conditions aren’t in place today.

Another reason for the initial meme stock trades may have been that interest rates were near record lows. Cash offered almost nothing in the way of a return, so trading stocks may have felt like a way to earn something, despite its high risk. But in 2024, interest rates are much higher and savers earn decent yields on the cash they hold. Investors may be looking ahead to potential rate cuts by the Federal Reserve, but those are far from a guarantee.

Part of the challenge in explaining the price movements of meme stocks is that the change in share price can’t be explained by the fundamentals of the underlying businesses. GameStop’s sales fell about 11 percent in its 2023 fiscal year compared to 2022 and fell nearly 20 percent during its fourth quarter. The company earned just $6.7 million in net income in 2023, which is far from justifying its market value of over $9 billion.

But people trade stocks for many reasons, not all of them supported by sound financial logic. A single social media post from Roaring Kitty may ignite the animal spirits that were in place during the pandemic, causing people to rush to buy shares of the same stocks to ensure they don’t miss out on potential gains.

But traders should keep in mind that even after their recent surge, GameStop shares are still down about 75 percent from their 2021 peak.

Legendary investor Warren Buffett offered an observation on market behavior in his 2023 letter to Berkshire Hathaway shareholders.

“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young,” 93-year old Buffett wrote. “The casino now resides in many homes and daily tempts the occupants.”

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.