Understanding the 'quasi-religious fervor' behind meme stocks
Meme stocks have wiggled their way back into Wall Street conversations as social media companies Trump Media & Technology Group (DJT) and Reddit (RDDT) began trading at high valuations despite the companies actively losing money.
Public COO Stephen Sikes and Interactive Brokers Chief Strategist Steve Sosnick join Yahoo Finance to discuss the renewed interest in meme stocks, FOMO investing, and what investors need to keep in mind when considering chasing this trend.
Sosnick explains his rubric for the hallmarks of a meme stock: "Number one is sort of a quasi-religious fervor. It's one thing to be enthusiastic about a stock. It's another thing to just be so hyped up about it. Think about how the real apes were in AMC (AMC), the real devotees in GameStop (GME) early on. Certainly one could say that about the former president's base, who I think has helped getting DJT stock moving. Second, and sort of part and parcel with this, is disregard for fundamentals. If you're believing in the faith of the stock, if you have... a non-analytical view of the stock, then you can disregard the fundamentals."
Sikes breaks down one of the reasons behind the increased activity behind these stocks: "Retail investors really love to follow trades that they are familiar with. Companies they know, companies they understand, and you know, familiarity can come from again them being customers that use the products or even learning about it on social media or Reddit like we've seen with this sort of meme stock trade. So, I think that level of familiarity really drives retail investor interest."
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Editor's note: This article was written by Nicholas Jacobino
Video Transcript
- Well, it's a big week for meme stocks with GameStop shares plummeting after its fourth quarter sales dropped compared with a year ago, the company almost killing the meme momentum which was reignited by the public debut of the platform that started it all, Reddit, shares of that social media platform bouncing back after initially dipping after GameStop's results came out.
We're also watching another meme stock contender, shares of Donald Trumps Truth social media company, DJT, surging after its public debut on Tuesday. With new names in the mix, what's next for the meme trade? Joining us now, we've got Steve Sosnick, Interactive Brokers chief strategist. We also have Stephen Sikes, the COO of investing platform Public. Guys, thank you both for being here.
I love that we've got the Steve's joining us this morning. Stephen, I'm going to start it off with you. I'm curious. You're a great voice to speak with on this because you're the COO of an investing platform. Talk to me about the biggest takeaway that you've had so far regarding meme stocks in terms of the user behavior on the public platform.
STEPHEN SIKES: Yeah, I mean, I think it's interesting that this idea of meme stocks has become a real trend, but I think it really reflects two things that we to be true about retail investors, and what we see as being highly predictable behavior.
One, retail investors really love to follow trades that they are familiar with. Companies they know, companies they understand, and familiarity can come from again them being customers that use the products or even like learning about it on social media or Reddit, like we've seen with this sort of meme stock trade. So I think that level of familiarity really drives retail investor interest.
And then the second thing we know is going to drive retail investor interest in trading behavior is volatility and momentum. And so I think as we see things like Reddit debuting and having a very strong debut against a pretty short-- pretty small float, I think we see that drawing real attention from retail investors. I think we've seen the same thing with the DWAC to DJT DSPAC. We've seen really strong price momentum over the last couple of days, and really strong volatility, and I think that's brought a lot of retail investor interest.
- And Steve Sosnick, given what Stephen Sikes was just saying just about the appetite that we're seeing this risk on appetite, does that point to froth then in the markets at these current valuations?
STEVE SOSNICK: Good morning, Seana, I think we're-- if we're not there already, we're getting there. I think the beginning of this rally, you know, it's been momentum all along since November, but it's been-- but the leading momentum stocks have generally been stocks that have been delivering the goods.
NVIDIA is the poster child for the momentum trade, but to be fair, I mean, that company has been beating on revenues and earnings, and then guiding higher and then beating the higher estimates. So it does deserve that momentum.
But when you start to get into things-- when you start to see GameStop go up, when you start to see Reddit go up largely just because other things are going up and certainly DJT which from a fundamental basis does not really have much to speak of in terms of sales or earnings to justify roughly $9 billion valuation, this does become a very frothy market, and we're starting to see people chase stocks just simply because they're going up, not because of any fundamental reason. That, to me, indicates froth.
- Well, Steve, I want to stick with you for a second then because I'm curious if we're not seeing as much frothiness, just take a step back for me and tell me what you think a meme stock is because if we're talking about the fundamentals in this conversation, I feel like we're already not talking about meme stocks anymore.
STEVE SOSNICK: Yeah, well, thanks, Madison. I mean, what I basically been-- I've been trying to wrestle with this definition for some time, and those were the three things that I put in my rubric yesterday. I came up with one. And number one is a quasi-religious fervor.
It's one thing to be enthusiastic about a stock, it's another thing to just be so hyped up about it. Think about how the real apes were in AMC the real devotees in GameStop early on, certainly one can say that about the former president's base who I think was helped getting DJT's stock moving.
Second and sort of part and parcel of this is disregard for fundamentals. If you're believing in the faith of a stock, if you have a non-analytical view of the stock, well, then you could disregard the fundamentals.
GameStop, I guess is resounding on fundamentals today, but the rally that we saw earlier this week had nothing to do with it, and many of the rallies we've seen overall had nothing to do with it, and it's a very expensive stock by any conventional metrics.
And another element tends to be high short interest or a difficulty in borrowing it, and as Stephen mentioned in the case of DJT shares, it has a very small float, which means that those who want to-- those who believe it's overvalued find it almost punitive to bet against the stock right now because if you want to borrow it, it cost you about 150% annualized to do so.
That's huge, and that's very-- so it makes it very risky, very expensive, and those shorts when they get squeezed add to the fervor and help turbocharge the stock when it gets moving upwards.
