Meme stock mania may finally be over

It’s time to sing a requiem for a meme. Meme stocks, that is. Companies that attracted rabid followings from traders on Reddit and other social media sites in 2021 are struggling. Just look at GameStop.

Shares of the video game retailer, which will report its latest results after the closing bell on Wednesday, have plunged nearly 35% this year after surging by more than 685% last year.

GameStop

(GME) is expected to report a quarterly loss of $84 million and sales growth of just 4.5% from a year ago. The company is also said to be in the midst of a round of layoffs, according to a report from Axios. GameStop

(GME) was not immediately available for comment.

But GameStop isn’t the only meme stock, many of which became popular with traders because they thought it would be funny to try to punish hedge funds and other investors that were betting against them, that has fallen on hard times.

Shares of movie theater chain AMC

(AMC) have plummeted 55% this year. And the new preferred class of stock that AMC

(AMC) issued earlier this year, which has the ticker symbol of “APE” as a nod to the loyal fans on social media who refer to themselves as “apes,” plunged more than 90% from its peak price.

AMC is still losing money and the health of the theater industry remains challenged.

Box office revenue remains down sharply from pre-pandemic levels in 2019, as Hollywood is releasing fewer blockbusters in cinemas and moviegoers continue to choose to stay home and stream films and TV shows. Shares of theater owners Cinemark

(CNK), Marcus

(MCS) and IMAX

(IMAX) are all lower this year too.

Then there’s Bed Bath & Beyond

(BBBY).

The struggling retailer got a brief boost earlier this year when GameStop chairman and Chewy

(CHWY) co-founder Ryan Cohen took a stake in the company, leading to hopes among the memesters that he was planning a major turnaround. But Cohen dumped his shares in August. The stock is now down 75% this year.

Speculative stock craze is done

What happened? It appears that part of the problem is that the pandemic-fueled day trading frenzy is over. You don’t have nearly as many bored people stuck at home using stimulus checks to buy stocks, given that the unemployment rate is just 3.7%, down from a peak of 14.7% in April 2020 when the pandemic first hit the US economy. Americans are no longer facing Covid lockdowns, and many people have returned to the office… at least on a part-time basis.

But investors may also be realizing that companies like GameStop, AMC and Bed Bath & Beyond face legitimate challenges. Earnings, sales and other fundamentals matter after all, especially in an economy that is starting to show signs of weakness.

“There is still plenty of danger in equities. There are no real bargains,” said Matt Smith, investment director with Ruffer. Smith argues that there are still better opportunities for investors to short stocks, i.e. bet that prices will go down, than there are long-term buys.

But mostly, investors are aware of the fact that in uncertain times like this, it may make more sense to play it safe instead of taking a huge gamble on a meme stock.

Interest rates are continuing to rise. That makes the 10-year US Treasury, which has a yield of about 3.6%, fairly attractive.

“Bonds look better than they have in 15 years,” said Steve Wyett, chief investment strategist at BOK Financial.

Wyett notes that the Federal Reserve is not done raising rates just yet. The central bank’s key short-term rate is now in a range of 3.75% to 4%.

Another rate hike when the Fed concludes its policymaking meeting on December 14 is a given. The only question is whether it will be just a half-point increase or the Fed’s fifth-straight bump of three-quarters of a point. And Wyett says the Fed is likely to keep raising in early 2023.

“The impact on the stock market of what the Fed has done to this point and may still do remains is in front of us,” he said.

Add all that up and it’s a miserable time for investors to be considering speculative meme stocks.

Higher interest rates will make it even more challenging for struggling, unprofitable companies to pay down debt, added Steven Wieting, chief investment strategist at Citi Global Wealth.

“There is a level of risk aversion in this market. When you sum up the bulls and bears this year, the bears have won,” Wieting said.

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