Krispy Kreme joins the meme stocks. How these two trends have powered the revival

The resurrection of the meme stock theme started by GameStop has some experts wondering if it is a sign of investor complacency or an extension of the so-called ‘gamification’ of investing.

Krispy Kreme is the latest meme stock. Picture: AP Photo

The recent revival in meme stocks, evident in Wednesday’s 25 per cent surge in Krispy Kreme, could reflect both a targeting of investors betting against the bull market and the impact of passive investment strategies that have sapped liquidity and stoked volatility.

Opendoor Technologies appeared to resurrect the meme stock theme, birthed in 2021 by the meteoric surge in video game retailer GameStop, by soaring more than 188 per cent last week.

Several names have followed, including Beyond Meat, up nearly 12 per cent on Wednesday, and gadget maker GoPro, up 50 per cent.

The moves have left some analysts and commentators on Wall Street wondering if the revival is yet another sign of investor complacency, or the logical extension of the so-called “gamification” of investing, powered by the massive expansion of online platforms – such as Robin Hood and Coinbase Global – that facilitate impulsive trading from retail investors.

The meteoric surge in video game retailer GameStop in 2021 started the meme stock theme. Picture: AFP

Robert Ruggirello, chief investment officer at Brave Eagle Wealth Management, which manages pension funds for retired New York City firefighters, thinks it might be far simpler – and worrying.

“There is no obvious cause beyond simply chasing momentum,” he said. “Retail investors are becoming very confident in their stock-picking skills, even though there is no fundamental work being done.”

Others, such as Ihor Dusaniwsky, who heads predictive analytics at S3 Partners, aren’t so sure.

He sees the current dynamic as a co-ordinated effort to identify stocks that have large numbers of investors betting against them.

“With passive strategies swallowing vast portions of the market, the available float for trading has shrunk dramatically, transforming liquidity into a volatile, high-stakes game,” he said.

A recent paper from Apollo Global Management, co-authored by Torsten Slok, suggests that passive investing now comprises more than 50 per cent of global equity mutual funds and exchange-traded funds; that’s up from around 25 per cent in 2012.

“We’ve entered a new phase where active investors go toe-to-toe with short sellers in daily clashes, each side armed with conviction and capital,” he added.

Kohl’s is a great example of that tension. Mr Dusaniwsky notes that passive investors, such as pension funds and ETFs, own around $US656m ($990m) in Kohl’s shares. Hedge funds hold around $US595m.

Active investors are going toe-to-toe with short sellers in stocks such as struggling retailer Kohl’s. Picture: AP Photo

The struggling retailer’s shares powered 8.8 per cent higher on Monday, soared 38 per cent on Tuesday, and were last seen trading 17 per cent lower on the session Wednesday.

While that leaves the stock down 16 per cent for the year, its five-day gain has added $US500m in value.

Curiously, that tally is largely in line with the level of investors betting against the stocks.

S3 Partners data show short interest in Kohl’s at around $US534m, or 48 per cent of the stock’s outstanding float.

Short sellers bet against stocks by selling shares in a company and then borrowing them from another investor.

If the share price declines, they can return the borrowed shares, repurchase the stock, and pocket the difference (while paying a fee to the lender).

However, a short seller’s risk is infinite, given that stocks can theoretically rise forever, while an investor can only see his stock fall, at worst, to zero.

That leaves those betting against stocks vulnerable to what is known as a “short squeeze”.

If enough buyers can increase a share price with purchases, they can force the short seller to close out his or her position at an even higher level in order to avoid steep losses. That can fuel added interest in the stock, taking it even higher. But it can also trigger declines that are just as dramatic.

Opendoor Technologies, which has surged more than 340 per cent this month, its best performance on record, is now down more than 30 per cent over the past two trading sessions.

While differing on the cause of the current meme stock revival, both Mr Dusaniwsky and Mr Ruggirello agree on one thing: Investors need to be careful.

“In this charged atmosphere, even a single dollar of uncommitted capital can generate jaw-dropping price swings within a single session,” Mr Dusaniwsky said.

“When we start to see people with no investing experience giving out stock tips and relying on social media for investing ideas, that’s when caution is warranted,” Mr Ruggirello said.

Barron’s