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This week, as meme stocks resurged into the forefront of market discussions, we published pieces that explained the current flowering of that phenomenon. On Tuesday we noted the goings on in Kohl’s (KSS) and Opendoor (OPEN), and yesterday we offered a “Mad Libs”-style rubric to help identify them. That said, someone pointed out how that while those articles certainly explain the “how” and “what”, I should expand on the “why”. 

During a media visit a month ago I used a term that caught the host by surprise: “flight to crap”.It’s one that I started using during some of the post-covid excesses as the inverse of the “flight to quality” that occurs when concerns about risk come to the forefront.I explained to the anchor that we were seeing signs of it, with investors showing an increasing willingness to seek out risk via speculative stocks and asset classes.  I used it again this week with a print journalist to describe the rationale behind the resurgence of meme stocks, and it seemed to get a bit of traction as a shorthand for traders buying low-priced and heavily shorted (usually with good reason) household names based solely on social media chatter.It seemed like an apt description.

The meme stocks are simply the latest manifestation of the nascent trend that I spoke about on TV a month ago.The risk seeking behavior can be seen in:

• increasing attention paid to high-volatility, high-volume stocks, which often rose on flimsy rationales
• the return of SPACs (“give me money and I’ll figure out something to do with it”)
• the wave of new crypto treasury stocks (“feel free to pay me a premium above book to buy crypto that you can but for face value in the market or via an ETF)
• record margin debt
• VIX around 15 tells us there is little demand for protection

I see this behavior as a logical outgrowth of recent investor successes.For the better part of the past three years, investors have been rewarded handsomely for embracing risk, particularly those who did so during the April selloff.The understandable takeaway would be that risk pays, and thus the more risk one takes, the more one is rewarded – particularly when you’re playing with “house money”, the profits you’ve made through astute investing and/or trading.

But here’s the problem with chasing memes: all investments need fresh money to continue their advance. If you’re buying stocks with solid fundamentals, that money flow should continue. Whether or not you think a stock like Alphabet (GOOGL, GOOG) is priced correctly, it was clear from their latest report that they make oodles of dough.That’s rarely the case for stocks that are low-priced, heavily shorted, and up on a social media induced spike.There is usually a reason why those stocks are heavily shorted and low priced in the first place.It has become clear that the initial rush of money into recent memes had little to no follow-through, meaning that those who bought on the initial spikes were a source of liquidity for those who bought before the chatter.Traders don’t like being used as suckers, and that may be why we didn’t get a new meme today.

Hopefully I’ve been able to explain some of the “why” behind the recent meme stock flurry.I also hope that next week we can go back to discussing things like the FOMC meeting, megacap tech earnings, and other less effervescent topics.

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