Meme stocks like AMC and GameStop get their price spikes from strong buying interest. But those sudden and sporadic gains are as unpredictable as they are risky.
GameStop reported its third quarter results on Dec. 10, a key event for meme traders. Sales of $860 million on a loss of 4 cents per share missed analysts' estimates of $887.7 million in revenue and a loss of 3 cents per share. Still, shares jumped more than 7% the next day.
The company also stated that it plans a "comprehensive store portfolio optimization review which involves identifying stores for closure based on many factors including an evaluation of current market conditions and individual store performance." The review may result in more store closures than in the past few years as GameStop seeks to attain what it calls "sustainable profitability."
During the quarter, the company also entered a new business and started providing autograph authentication for trading cards at some of its stores. Shares have been treading the 21-day moving average since the results.
'Roaring Kitty' Ignites Meme Frenzy
This month, a cryptic post by Keith Gill aka "Roaring Kitty" moved meme stocks. On Dec. 5, the meme investor posted an image of a mocked-up Time Magazine cover with a blank computer screen and keyboard on Twitter/X.
AMC soared after the post, but fell 9% the next day. Shares fell after the movie theater company announced on Dec. 6 an agreement to sell 50 million shares, according to a filing with the Securities and Exchange Commission.
GameStop and AMC are known for volatile movements associated with meme stocks. But are meme stocks a buy now?
Buying Meme Stocks Without Vetting Is Risky
Buying stocks just because they are rallying is a poor strategy. It is better to bring a time-tested method for stock picking and search for buy points in proper bases. Reading their charts can show the risks involved.
Shares of AMC have been trading along the 50-day moving average for weeks now, with the stock basically going sideways.
Third-quarter results announced Nov. 6 lifted shares but the stock quickly gave back the gains. Sales of $1.3 billion declined from $1.4 billion in the year-ago period, while a loss of 4 cents per share showed an improvement from a loss of 9 cents a share a year ago.
In July, the company refinanced and extended $1.6 billion in debt maturing in 2026 to 2029 and beyond. FactSet estimates suggested that AMC held a total of $4.5 billion in debt.
The meme stock has IBD Ratings that are well below ideal levels. The Composite Rating is just 17.
Panning out for a longer view, IBD MarketSurge's monthly chart highlights the wild swings that are typical of meme stocks. From a split-adjusted closing price of 11.49 on Dec. 31, 2020, AMC shares hit an all-time high 393.65 on June 2, 2021. That's a gain of 3,326%. But the stock has crashed since then.
GameStop's Risky Trading
GameStop's volatility is cause for caution. For one thing, volatile movement provides little opportunity for well-formed bases.
Further, the stock is down more than 75% from its all-time high 120.75, reached in January 2021.
Going back further, the video game retailer grew an investor fan base in late 2020 at the height of the meme-stock frenzy. By January 2021, the meme stock shot up 1,625% to 81.25, then crashed to 9.63 the very next month.
Investor's Business Daily recommends stock picks based on strong fundamental performance and chart action while also paying attention to the market and managing risk.
GameStop has an IBD Composite Rating of 64, reflecting weak chart action and fundamentals.
Meme Stocks Rally In May
Dramatic movements are common in meme stocks like GameStop.
Meme stocks rallied in May after Gill posted on X for the first time since the pandemic. AMC soared as much as 308% May 13-14 and GameStop gained 271% to the peak of the same two-day period. But today those gains have vanished almost entirely.
AMC quickly gave up its gains after the movie theater company on May 15 announced an equity swap to exchange 23.3 million newly issued shares for bonds worth $163.9 million maturing in 2026.
Top Financial Soars, Comes Back Down
Top Financial was a perfect example of meme stock volatility. The stock skyrocketed in one day from 48.60 to 256.44 on April 28, 2023 — a 428% gain. It quickly crashed and traded for under 10 by May 2023.
Top stock came public on the Nasdaq in June 2022. The initial offering priced at $5 per share for 5 million shares. Shares popped on the first day of trading, reaching a high of 27.50.
The stock rallied more than 50% in early May last year in meme-like action, then reversed gears and fell more than 70% in a single day. Shares have trended even lower since.
The stock is trading around 1.60 a share now. It surged 65% on Feb. 9 and was back to its usual trading range the next day. There was no news on the company.
The Hong Kong-based fintech generates revenue through commissions on trades of equities, futures and options. Its Composite Rating stands at 9.
Meme Stocks A Buy Now?
A meme stock is a speculative play, known for high levels of unpredictability because it can rally or crash in any market, and at any time. Its meteoric rises and heart-stopping crashes typically depend on social media hype and online interest.
Hyper stock valuations for these companies depend, for the most part, on young fans and an anonymous following that can appear or disappear overnight. Retail investors dominate the interest in these stocks.
These stocks do not follow traditional investment wisdom, which says you should buy stocks based on earnings growth and performance. As such, they are extremely speculative.
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