The meme stocks are not dead yet. Why GameStop and AMC are holding up

Published Wed, Mar 23 20222:03 PM EDT

Meme stocks are staging a big comeback with GameStop popping a whopping 60% this week alone. The shares have proved detractors wrong who believed they would return to their pre-meme-craze levels in short order. Can these stocks stay at these levels or will their loyal retail investors eventually throw in the towel as the companies' fundamental turnaround plans continue to come up short? GameStop is enjoying a strong rally this week as traders got a vote of confidence when chairman Ryan Cohen bought additional 100,000 shares of the video game retailer. However, the move made many scratch their heads as the Chewy co-founder hasn't detailed any concrete plans for the ecommerce transformation. Meanwhile just last week, GameStop posted an unexpected loss for the holiday quarter. "The memes are back," CNBC's Jim Cramer said on "Squawk on the Street" Wednesday. "I think what we've lacked, of course, is a plan. The numbers weren't that great for GameStop. We still don't understand what he intends to do. Once he lays it out, I think we can make a judgement... He comes in just right when the 'apes' are kind of desperate." Meanwhile, AMC Entertainment has surged over 30% this week quietly as investors kept pushing up the stock even after the movie theater chain revealed recently a confusing move to buy a tiny gold miner. The comeback in these meme names is particularly surprising as the overall stock market just suffered a correction on fears of rising rates and inflation, an environment where investors would usually flee risk assets and they did so in most cases. One explanation for the recent rally could be that the small-time investors that own these stocks are novices who don't have many other holdings. So they aren't necessarily responding to an overall "risk-off" environment for the market. A recent survey from Ally Invest found that more than 80% of investors who bought meme stocks in the last 12 months still own them, and over half of them said they would buy more of those shares again. "Many who dove into the trend were new to investing, didn't have a lot of money to invest, and were interested in finding a way to make a little extra money," said Lindsey Bell, chief markets and money strategist at Ally. "It was more about making money than taking on Wall Street." About 56% of GameStop outstanding shares are owned by the public, and retail ownership of AMC shares is roughly 65%, according to FactSet. These are far greater percentages than average. Back to $0? Still, many fundamental-focused investors are worried about the future of these names as they are trading at levels completely detached from their future earnings expectations in their eyes. Short-seller Jim Chanos said in a tweet Wednesday that GameStop's fundamentals are further deteriorating but that's being ignored by passionate retail investors. At the same time, recent moves from GameStop and AMC seemingly would do little to revitalize their businesses. GameStop said it's launching a new marketplace for nonfungible tokens, or NFTs, by the end of the second quarter. AMC Entertainment took a major stake in Hycroft Mining, a Nevada gold and silver miner, that has been on shaky financial ground. "There is absolutely no fundamental reason to own shares of GameStop, so long as the stock is trading above $45 per share," said David Trainer, CEO of New Constructs. "GameStop faces too much competition from Walmart and Amazon and the rise of digital gaming continues to put pressures on GameStop's business model." Trainer said AMC's purchase of the gold miner reinforces his view that AMC's stock could decline to $0. "AMC's irresponsible decision to purchase a stake in a gold miner is a misallocation of capital and it makes absolutely no sense for AMC's business," Trainer said. Those who bought in the first few days of the meme breakout have more than tripled their money if they held. But outside of those lucky few, most shareholders who bought in the last 12 months are underwater. Despite this week's big rallies, GameStop and AMC are still both in the red for 2022, down 4% and 22%, respectively. And investors who bought at the very top of the meme crazy are down big. Will these underwater retail investors keep hanging around if fundamentals don't soon justify their enthusiasm? Most big investors and analysts don't believe they will.

Jakub Porzycki/NurPhoto via Getty Images

Can these stocks stay at these levels or will their loyal retail investors eventually throw in the towel as the companies' fundamental turnaround plans continue to come up short?