No matter which side you were on during the initial meme stock mania in 2021, we can all agree on one thing – the market felt like the Wild West out there.
Out of the bunch, GameStop GME was the most popular, shaking the market violently with a short squeeze of a magnitude rarely seen.
Of course, other meme stocks, including AMC Entertainment AMC, also became a nightmare for short-sellers, causing violent price swings.
And as we’re all aware, they’re back. Below is a chart illustrating the performance of each in May.
Image Source: Zacks Investment Research
Let’s take a closer look at the mania.
Roaring Kitty Returns
Roaring Kitty (Keith Gill) was the prominent figure in the initial 2021 meme craze, helping kick off the period by shifting attention toward short sellers. An epic short squeeze ensued in GameStop shares, with other heavily-shorted stocks, such as AMC Entertainment, also causing pain for short sellers.
After January 2021 was over, GME shares closed up more than 1500%.
The excitement subsided over the years until ‘Roaring Kitty’ recently made a social media post, breaking three years of silence. Meme-stock traders clearly heard the call, with GME shares up 350% in May alone.
GameStop’s Current Standing
GameStop recently reported quarterly results, falling short of our consensus EPS estimate by 12% and posting sales 10% below expectations. Earnings saw modest growth, whereas sales declined 20% year-over-year.
Below is a chart illustrating the company’s revenue on a quarterly basis.
Image Source: Zacks Investment Research
The company’s outlook has shifted lower across the board, with the stock presently carrying a Zacks Rank #5 (Strong Sell). A short squeeze has fueled the recent melt-up, certainly not reflective of the company’s current earnings outlook.
Image Source: Zacks Investment Research
Final Thoughts
Once heavily-shorted stocks begin rising, it kicks off a vicious cycle for shorts, who are forced to cover their positions and buy back the shares they borrowed. This leads to massive losses for shorts that cannot cover their positions, while traders enjoy the rollercoaster.
That’s precisely what happened in 2021 with meme stocks such as GameStop GME and AMC Entertainment AMC. And it's happening again.
From a trading standpoint, the volatility of these stocks is a dream.
But for investors, it’s crucial to focus on solid business fundamentals rather than one-day price swings.
It raises a valid question – will short sellers continue to be caught off guard?
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