(Bloomberg) — Meme stock mania is spreading to a growing number of speculative stocks, underscoring the appetite among retail traders for riskier bets even with the market at all-time highs.
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Chatter across social media platforms first fixed on Opendoor Technologies Inc. but has since expanded to other heavily discounted names like Kohl’s Corp., GoPro Inc. and Krispy Kreme Inc., sending them all flying to eye-popping rallies.
While the number of stocks being drawn into the frenzy is growing, the rallies have been volatile and often short lived, raising questions about whether the companies will be able to take advantage of their elevated share prices to raise fresh capital, the way that AMC Entertainment Holdings Inc. and GameStop Corp. did during the original meme stock craze of 2021.
Krispy Kreme, for example, rose as much as 39% when the market opened Wednesday, but closed just 4.6% higher.
For the amateur traders making these dicey bets, it’s less about company fundamentals or long-term prospects and more about the online personalities endorsing them, according to Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions.
“A lot of times with meme stocks in general, what the business does is much less important than who’s backing the stock,” he said. “Finfluencers are commanding these followings. You may have this one person posting on TikTok about a stock they like and then there’s 100,000 or more investors who are putting money behind it.”
According to Citadel Securities, retail traders were net buyers of cash equities for the past 19 straight trading sessions, the longest streak since the frenzied days of the 2021 meme stock craze. The 10-day average of retail participation in non-profitable technology companies reached 23% — the highest level since a Goldman Sachs trading desk began tracking it — and rose to 25% this week.
Many of the stocks have come into focus because they have high levels of short interest, indicating that more sophisticated investors have been betting against them. Retail traders are hoping to take advantage of a short squeeze in which short sellers are forced to get out of their trades by buying back the shares, sending the stock higher.
“It’s almost like a broad rotation where the winners are getting sold for the losers and those losers are getting squeezed,” said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.
Opendoor
Until very recently, shares of digital real estate firm Opendoor Technologies were trading under $1, putting it at risk of being delisted. A series of posts praising the stock from Eric Jackson, founder of Toronto-based hedge fund EMJ Capital, caused it to jump 312% in just six days through Monday. Behind the spike lay an explosion in options flow — over 2 million contracts changed hands earlier this week, surpassing the levels seen during GameStop’s 2021 heyday. On Wednesday, shares of Opendoor retreated for the second day in a row, falling 20%, following the massive six-day run up. More than 515 million shares exchanged hands on Wednesday, more than 340% of the average over the last three months.
Kohl’s
Of the latest meme stock breakouts, shares of the beleaguered retailer Kohl’s have the highest short interest. Some 48% of the free float of the $1.3 billion stock have been borrowed for the purpose of shorting the company, according to data compiled by S3 Partners. That has led to some talk on message boards about the stock rising as a result of a short squeeze. Kohl’s shares tumbled as much as 14% on Wednesday after surging 38% higher at market close on Tuesday. The company was in the spotlight a few months ago following the firing of its recently appointed chief executive officer, Ashley Buchanan, due to allegations that he directed business to a romantic partner.
GoPro
Wearable camera maker GoPro has soared 75% this week, including a 12% jump at Wednesday’s close — its biggest weekly gain on record. The company, which has a market capitalization of about $243 million, has drawn retail interest on social media platforms in part because of its elevated short interest of nearly 10% of the float, according to data compiled by Bloomberg. This year, the company has been embroiled in a patent-infringement dispute with rival Insta360.
Krispy Kreme
Doughnut maker Krispy Kreme shot up over 35% on Wednesday morning before falling back, bringing its weekly gain to 38%, more than in any previous week. The volume of call options on the stock reached a record level Tuesday, with more than 1 million contracts trading, as investors loaded up on bullish wagers to chase the rally. Before the recent retail-driven surge, the shares had been under pressure after the company halted quarterly cash dividends and ended a partnership with McDonald’s Corp. on cost issues. About 30% of its outstanding shares are sold short, according to data compiled by Bloomberg.
As the number of stocks attracting retail traders is growing, Joe Gilbert, portfolio manager at Integrity Asset Management, cautioned of warning signs ahead.
“Most of the excitement from retail traders has been because of the success of buying the dip after Liberation Day,” he said. “Their confidence is unwavering now and that is the perfect setup for a correction.”
–With assistance from Natalia Kniazhevich.
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