Are DIY investors still interested in meme stocks like AMC and Gamestop?

Fuelled by market volatility, a plethora of cheap trading apps and social media frenzy, a new generation of DIY investors has emerged from the pandemic.

It came to a head in January when Reddit thread r/wallstreetbets sent shares in so-called meme stocks flying.

Whether a battle between small investors and Wall Street or a get-rich-quick scheme for others, it captured the imaginations of thousands of young investors.

Gamestop became the face of the meme stock frenzy in January 2021 after Reddit investors piled into the unloved stock 

The popularity of Gamestop, which sells shrink-wrapped video games, had dwindled in recent years as consumers move online.

Last autumn, activist investor Ryan Cohen stepped in to help revive the company but other investors and hedge funds were unconvinced. They took out short positions against the retailer.

In January, Cohen joined the Gamestop board which helped to boost its share price from $19.95 to $39.12 in just 9 days. 

An army of novice Reddit traders then flocked to Gamestop lifting its share price to nearly $350 after Elon Musk’s ‘Gamestonk’ tweet.

Attention then turned to other stocks that had fallen out of favour, like cinema chain AMC Entertainment and even Nokia at one point.

Investors are still backing meme stocks

Now the dust has settled, it seems those who bought at the peak in mid-January are nursing losses. 

Gamestop is trading down nearly 50 per cent from its January highs, although it has soared 880 per cent in the year-to-date.

This volatility means that in the worst case scenario, Gamestop investors could have lost over two thirds of the value of their investment in a month. 

Analysis by Boring Money reveals a £10,000 shareholding would have been worth just £3,129.

In the best possible scenario, an investor could see a £10,000 investment soar to £168,744 if they’d bought a month before the price surge and then sold at its peak.

At the time, many experts warned the Gamestop saga would end in tears for the majority of investors. 

But the pull of meme stocks is understandable in the current economic environment.

‘The allure of investments tipped to “go to the moon and back” is strengthened at a time where banks and building societies offer a pittance on cash savings amid the persisting record low interest rate environment,’ says Interactive Investor’s Myron Jobson.

Some investors are still banking on meme stocks: the r/wallstreetbets has switched its focus to cannabis stocks in recent months but Gamestop and AMC still remain popular choices.

‘As retail stores and cinema chains open up again, AMC Entertainment and Gamestop have been partly in demand with investors more confident about their longer term prospects,’ Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown says. 

‘There also appears to be a hangover from the revenge saga which played out earlier in the year when Gamestop was one of the targets of an army of retail investors’.

Both companies are still in the top 10 of most popular shares trading by Hargreaves Lansdown clients in June and July. 

AMC was the most popular overseas share to hold over the past two months, with Gamestop in second place. 

However the number of net buys has also fallen over the past month, with net buys of Gamestop shares falling by around 70 per cent by 19 July since a peak in early June, and net buys of AMC shares also fell 77 per cent.

Gamestop and AMC face an uphill battle 

Some investors may well be keen to hold their positions in Gamestop and AMC as the economy starts to reopen.

Gamestop’s revenue in the first quarter exceeded expectations and as of 1 May it said it had paid off its long-term debt, but it has lost money in 3 of the 4 last quarters.

‘The biggest issue would-be investors need to consider is whether Gamestop’s turnaround plan actually gives the business a shelf live beyond the next few years. 

‘Embracing an online marketplace will only take it so far,’ Danni Hewson, financial analyst at AJ Bell says.

‘Gamers are increasingly choosing to download content and we’ve already heard from streaming giants like Netflix that this is the arena where the next big tussle for subscribers will take place. Will Gamestop still have a place as the sector evolves or will it get lost in the tussle?’

AMC has taken a beating in the pandemic but it is widely expected to claw back some of these losses as restrictions ease and confidence returns.

‘The clock is ticking on all that debt ($5.4bn and $4.9bn in lease liabilities) and some costs that had been put on the back burner, like deferred rent payments will come due very quickly. Its current valuation makes little sense even if it does return to its glory days,’ Hewson says.

Like Gamestop it is battling a changing landscape as people stream films from the comfort of their own homes. 

‘Realistically AMC needs to evolve and expand, to take advantage of competitors that fall by the wayside and snap up property on the cheap, but that will take faith and a hole load more cash and it seems investors may not have the appetite for any more risk.’

Lessons learned

The allure of Gamestop and AMC, and perhaps meme stocks, seems to be drifting, but the online investment communities and trading apps are not going anywhere.

‘The cat is out of the social media bag as far as the financial markets are concerned and the influencer trend and investment chatter in internet forums is unlikely to wane,’ Streeter says.

‘Although in many ways it is encouraging that it’s sparking an interest in investing among younger people, there is the danger that if first time investors get their fingers burnt by investing in very risky stocks, they may walk away from the stock market and not return for a long time.’

Max Rothery of online financial community Finimize strikes a more optimistic tone: ‘The most exciting thing is we’re seeing evidence that these viral moments can lead to good investment habits. If new investors continue to learn together then this could be the smartest generation of investors yet.’

For the people whose first exposure to investment was the Gamestop frenzy, it may well have taught them a lesson. 

Trading platform eToro reveals investors in the UK have more balanced portfolios, holding equities (64 per cent), bonds (46 per cent) and cash (43 per cent). 

By contrast just 13 per cent of their retail customers invest in meme stocks.

Finimize member David Middleton says the meme stock saga prompted him to look closer at his investments moving forward. 

‘The Gamestop rollercoaster made me realise how much share prices can be influenced by sentiment and has made me focus on creating my own valuation and investment criteria, as well as making sure I’m well diversified.’

This post first appeared on Dailymail.co.uk