MEME STOCKS – FUNNY OR REAL?

The list of stocks hitting new 52-week as well as life-time highs on the bourses is only getting longer and longer. That automatically means, list of those hitting lows is very small – its just one-page long while high’s is 25-pages long on the BSE.

Even a cursory look at the names of stocks hitting new highs shows us that speculative activity is at an all-time high. It is more of penny and junk stocks, with no real fundamentals to stand on which are hitting new highs. Take a look - Tirupati Tyres, Tuni Textile Mills, USG Tech, Usha Kiran Finance, Virtual Global, Visagar Financial, TSpiritual, Tirupati Starch, Surat Textile Mills, SVC Inds, Symbiox Investment, Syncom Healthcare ….as we said, the list is 25 pages long. And it is dominated by stocks like these.

And then there are some stocks which are not too bad on the fundamental front, are doing relatively well as far as earnings go yet the pricing of the stock just does not justify the valuation. Praj Industries, Artemis Medicare, Aditya Vision, BCL Industries, Bright Brothers, Deepak Spinners, Craftsman Automation, Ease My Trip, Dhanvarsha Finvest and the list goes on.

This category of stocks have got a new name, befitting this new ‘social media’ generation – meme stocks. These are stocks which are “tipped” on the social media networks – all promising to be the next BIG thing – they all promise the same – buy now and see the money double up! And we all know that, that cannot be the sole criteria on which you can buy stocks.

So, how do you know recognize these meme stocks? Broadly, these are the characteristics:

Stocks are neither growth nor value

Governed by all hype and no logic

Usually overpriced

Erratic volumes

Spikes of rapid growth in short spaces of time

High volatility with valuations based around potential rather than financial

Fear of Missing Out or FOMO is the biggest motivator to buy

Slightest headwind and there comes panic selling

So should one fall prey to these meme stocks? Well, not all meme stocks are like penny stocks; some do have strong fundamentals. But the issue here is the valuation – the price far outweighs the fundamentals. This means we are setting up ourselves for disappointment at their next earnings call, and resulting in selling.

A huge social media hype doesn’t mean anything. Even if a company is tom-tommed about its future relevance – like electric car battery companies or has a visionary CEO or is at the cusp of bringing about a mega change across the world – like what Amazon did to online buying; we need to keep our feet firmly on the ground. These meme companies are moving up because of a future expected event but we need to examine whether the premium we are paying now is worth it.

Meme stocks are today at huge unjustified premiums and that means, be prepared for extreme volatility. Identify the traits and once we know to separate the truth from the hype, we will do well.