The ’Meme’ Stock Market Fad Has Finally Washed Out

The early 2021 meme stock fad had extremely fast and large runups. Additionally, the David vs. Goliath story was compelling. Therefore, even as the stocks pulled back, many supporters remained committed.

Finally, though, the meme stocks have washed out (that is, returned to their pre-runup prices – or lower). Their fate was foreseeable because, like all stock market fads, the weak fundamentals “win” in the end. For example, see my July 2021 article…

The two early favorites, GameStop
GME
and AMC Entertainment
AMC
Holdings, have been the remaining holdouts. While both declined over time to well below their 2021 highs, they still had enough followers to keep their stock prices above their initial levels.

AMC collapses

However, in August, AMC was hit with undeniably negative news, and the stock gave up the ghost, plummeting over 85% (from $55 to $8). That crash erased the last of the original January-June 2021 runup from $12 to $445.

AMC’s entire meme stock market fad period…

AMC’s final washout…

GameStop stands alone

So, that leaves only GameStop. As the most popular of the meme stocks, it is now the last one still standing. In January 2021, it zoomed from $5 to $120 in only two weeks (prices are adjusted for a later 4:1 stock split). Its current $17 price keeps it in that meme category, but a single stock cannot be a fad.

Therefore, the meme stock market fad is dead, and GameStop is simply a one stock speculation. As such, its fate is now dependent on fundamental support, and that is weak. It’s why 55M shares have been sold short (20% of the float). Time for another Reddit gang buying spree to frighten the shorts into covering (buying)? Nope. Lightening won’t strike twice.

Instead, what’s needed now is real improvement in GameStop’s fundamentals. They would validate management’s success at conducting its necessary strategic shift. Such an improvement is the only way to produce analyst forecasts of healthy future growth in revenues, positive cash flows and positive earnings. In other words, for GameStop to become a traditionally sound stock investment.

Without that positive scenario, its stock price will wither as the old meme investor popularity fades away.

GameStop’s entire meme stock market fad period…

The bottom line: Fads don’t carry over to a new bull market

When the next bull market emerges from this stretched-out bear market (yes, it is still a bear), all the 2020-2021 fads will be absent. That means SPACs, unproven biotech company IPOs, negative earnings story stocks, debt-ridden company IPOs from private equity funds, overly simplistic stock ideas, and, of course, meme stock investing will be over and out.

Because of the investor losses incurred (and the education gained), expect a more traditional stock market rise. Real earnings, dividends, sensible company management with sound finances and reasonable growth strategies to rule investment management activity.

One other change is likely: A preference for middle- and small-sized companies where managements are more focused and flexible. It’s where growth rates can be higher than large-sized companies. Such a shift, as in the past, will make the large-company-weighted stock indexes (like the S&P 500 and the Dow Jones Industrial Average) easier to beat. In turn, that better performance will lead to investors preferring actively managed funds to passive, index ones.