Shares of GameStop Corp. (NYSE:GME) have rallied 46% in the past five days, giving meme stock investors renewed optimism a turnaround is just around the corner.
Whitney Tilson, former hedge fund manager and CEO of Empire Financial Research, says meme stocks are simply experiencing a phenomenon known as a dead-cat bounce.
Dead-Cat Bounce Explained: A dead-cat bounce is a temporary, short-lived recovery in a stock that has been in a long-term decline. The term comes from the idea that even a dead cat will bounce if it falls from a great enough height.
Dead-cat bounces are often triggered by short sellers cashing out of their profitable positions by buying back the stock. Once the dead-cat bounce ends, the stock resumes its longer-term downtrend.
GameStop's share price declined from all-time highs of $483 in 2021 to as low as $77.58 earlier this month. In his daily newsletter, Tilson said the stock's recent rally back to $134 is a textbook dead-cat bounce.
In early January, Tilson included GameStop in his "dirty dozen" list of 12 stocks to avoid in 2022, which also included meme stocks AMC Entertainment Holdings Inc (NYSE:AMC) and Digital World Acquisition Corp (NASDAQ:DWAC). Eleven out of the 12 stocks subsequently crashed by more than 30% over the following three weeks.
Related Link: Is AMC Entertainment Getting Desperate?
GameStop and other meme stocks have allied alongside high-quality growth stocks since March 14, but Tilson says investors should be cautious of the sucker's rally.
"While I think this growth stock rally might have legs, what's happening with the Dirty Dozen is a classic 'dead-cat bounce'... so avoid these stocks at all costs, especially the three worst: DWAC, AMC, and GME," Tilson said.
Benzinga's Take: Meme stocks have repeatedly demonstrated they're not tied to the underlying fundamentals of their companies' businesses, making them extremely unpredictable and risky to trade on either the long or short side.
GameStop bulls have been touting the company's turnaround plan for more than a year now, but the company recently reported another $147.5 million net loss in the fourth quarter, which included the holiday shopping season.
