When Cap-Weighted Small-Cap Funds Own “Meme” Stocks

GameStop may be out of the news cycle, but it is not out of portfolios. The stock was on offer for as little as $3.85 per share last July, before Reddit’s “Wall Street Bets” message board got its hands on the heavily shorted stock, creating a squeeze that sent its price up several hundred points. That made GameStop a sudden heavyweight in many indexes, a condition that lasts to this day.

Posting Internet memes on it and other troubled companies like AMC Entertainment, the movie theater chain, a cultural phenomenon was whipped into such a frenzy that it became the lead story in the Wall Street Journal and in Twitter finance circles. This was especially so as the phenomenon rode a wave of anti-Wall Street sentiment, bringing down an obscure hedge fund—Melvin Capital—that was short the shares.

In a classic case of the Greater Fool Theory, dubbed “YOLO” in social media parlance (“You Only Live Once”), a swarm of retail investors sent GameStop straight up through $100 on January 25. By January 28, it nearly quintupled again; some unlucky soul shelled out $483 at the peak.

What does the Street make of GameStop? The consensus has the firm losing $2.14 per share in 2021 and 55 cents again in 2022. Will it make money in 2023, or ever again? Unless your kids start agitating for you to drop them off in front of Sears, the way I did it in ’92, it seems like a business model that has a bumpy road ahead.

And yes, I mentioned Sears specifically. I imagine my children have never heard of it.

The problem with watching GameStop “from the outside” is that you probably own it and a handful of other meme stocks1 in any small-cap index fund that is market capitalization-weighted, such as those that track the Russell 2000 Index.

Sure, GameStop is no longer dominating your Twitter feed, but the stock is still $138 per share. That makes it a potential $10 billion play on physical video game cartridges sold next door to an empty J.C. Penney.

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Disclosure:There are risks associated with investing, including possible loss of principal. Funds focusing their investments on certain sectors and/or smaller companies increase their vulnerability ...

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