May 22 (UPI) — GameStop stock surged early last week in a brief reoccurrence of the “meme stock” craze that disrupted markets in early 2021 and experts remain unsure what to make of it all.
Shares of GME shot up 74% during the surge, putting short sellers down an estimated $1 billion. The sudden rally coincided with, or was spurred on by, the reemergence of Keith Gill, also known as “Roaring Kitty,” on social media.
“It’s still a puzzle,” Stephen Foerster, finance professor in the Ivey Business School at Western University, told UPI. “The most recent events with GameStop were just as puzzling.”
Gill was the “guru” that led a movement by retail investors to buy up shares of GameStop in late 2020 and early 2021. The cat-clad, headband-wearing Redditor posted an image on X last week depicting a gamer sitting up in their seat, indicating that they are getting more focused on the game.
It was Gill’s first post since 2021.
The post was cryptic, but it was enough to draw the attention of financial analysts like Jay Ritter, professor of finance at the University of Florida’s Warrington College of Business.
“With coordinated action, sometimes it’s based upon news. Sometimes it’s just somebody like Roaring Kitty posting a graphic and people see that and say this is a signal to buy,” Ritter told UPI. “If other people then buy it can have an effect.”
Shares of AMC, another darling of meme stock investors in 2021, also took a dramatic turn upward, rising from $2.91 per share on May 10, to a peak at $6.85 on May 14, a more than 235% increase in value.
The rally by GameStop may have been short lived for the time being, but Ritter said it is still significant. A 50-day average of 21.7 million shares have been traded and there are about 306 million shares outstanding, according to MarketWatch.
Ritter adds that about 3% of shares have been traded daily in recent weeks. The average company has less than 1% of shares traded daily. Last Monday, about 187 million shares were traded. On Tuesday, it was about 206 million.
“This is indicating it’s more than a handful of individuals buying shares,” Ritter said. “Then on Wednesday it was only 132 million which is still an incredibly high trading volume.”
At its peak, GME shares rose by more than 134% in one day on Jan. 27, 2021. Nearly a month later it rose by more than 103%.
The flurry by GME was brief, but Ritter said it is a reminder of the effect that a group of coordinated retail traders can have.
“To some degree it has happened this week,” Ritter said when asked if an event like 2021 could happen again. “Anybody who was shorting it, if they held onto their shares they still lost relative to where they were at.”
Retail traders are often of little concern to the larger investment management companies and hedge funds that engage in short selling. At least they were up until 2021.
Foerster considers so-called meme stocks a cautionary tale for companies that take large short positions on single stocks.
“I still think it’s a cautionary tale for investors that retail investors seem to still be able to act in what might be considered an irrational way in terms of investing heavily in a particular stock,” Foerster said. “Yet one ignores these retail investors at their own peril.”
Foerster said he would not be surprised if institutional investors began monitoring social media channels like the r/WallStreetBets sub-Reddit since GameStop’s rally in 2021.
“Trading is all about information,” he said. “We know since 2021 this has been an important source, Reddit and other places.”
When a company shorts a stock, they are in a sense betting that the value of its shares is too high on the market and will fall. The company stands to make marginal profits per share, which adds up quickly when millions worth of shares are involved.
However, if the hedge fund or similar company is wrong and the stock’s value increases, there is theoretically no limit to how much the company can lose.
This is what happened to Melvin Capital in 2021 when retail investors banded together to buy and hold millions of shares in GameStop. The hedge fund, founded by Charlotte Hornets co-owner Gabe Plotkin, held a substantial short position in the stock. It lost an estimated $6.8 billion and ultimately closed its doors.
Roaring Kitty’s role in GME’s trading activity is novel considering his relative anonymity prior to the GameStop craze. Foerster and Ritter said it is not uncommon for an individual opinion to have some influence on market sentiment, however.
Key figures like Warren Buffet, chairman and CEO of Berkshire Hathaway, have also had an impact on market activity for years, Foerster said.
Other stocks have also shown they can ebb and flow based on the news cycle and the actions of prominent individuals. One stock that comes to Ritter’s mind is former President Donald Trump’s newly-public company Trump Media Inc.
“Indeed with Trump Media’s annual sales of about $4 million, losing money hand over foot and not having revenue growth, yet a valuation of something in the vicinity of $8 billion, there’s just no way you can tell a plausible story that the company is going to be generating hundreds of millions a year,” Ritter said.
“These stocks generally acquire attention,” he explained about meme stocks. “The attention might be from Donald Trump. It might be from Roaring Kitty. It might be news about a company. An earning announcement. What characterizes meme stocks like GameStop, AMC and Trump Media, the price is just totally divorced from the fundamentals.”
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