Usually, when a joke gets too out of hand, someone ends up embarrassed, and tempers flare up beyond reason. But sometimes, an out-of-hand joke becomes something more “tangible.”
Pet rocks, the company Slob Proof, and the website “Ship Your Enemies Glitter.com” all started out as jokes. In fact, the cryptocurrency Dogecoin came into being as a joke and now has a total market cap of US$28.2 billion (more than the GDP of Iceland).
Ironically, meme stocks, which contain the word “meme,” which is literally a medium for humor and jokes, didn’t actually start out as jokes. In this article, I will help you understand what meme stocks are and some of the best meme stocks you can invest in.
What Do You Need To Know About Meme Stocks?
The world of investment changed (quite literally) with the introduction of commission-free trading and the app that facilitated it, i.e., Robinhood. Its impact was phenomenal, and it gave more people exposure and a way to control their investments.
More retail investors joined the market, and in 2019, major US brokerages (the big four) ended charging commissions as well.
Robinhood, befitting its name, gave the “power of investing” to the masses directly by cutting out the brokerage commissions, but that was only just one factor behind the rise of meme stocks.
The other was social networking communities built around trading. One of these communities, a subreddit called “Wallstreetbets,” targeted one of the most short-sold stocks on the New York Stock Exchange, i.e., Gamestop.
Short selling is the practice of betting against an asset, and short-sellers make a profit as the value of the asset drops.
In a way, Wallstreetbets pit retail investors (many of whom followed them on the subreddit and using other social networking communities) against Gamestop’s short-sellers, many of which were large hedge funds.
When retail investors started a buying frenzy, the value of the stock shot up almost overnight. It grew 1,600% in less than twenty days. Consequently, the short-sellers that were betting on the stock going down booked significant losses.
They lost billions due to Gamestop and other meme stocks going up rapidly, and one London-based hedge fund had to close down.
This is also known as a short squeeze, and it’s a well-established phenomenon and has been around far longer than meme stocks.
What Are Meme Stocks?
Now that you understand what meme stock “phenomenon” is and why it got this name, it’s imperative to understand what meme stocks are and why you should care. Meme stocks are stocks that get popular on social media, and retail investors start buying them en masse.
These investors don’t look into the fundamentals of a stock (its valuation and financials), nor into the companies themselves; they simply follow the trend.
Which sometimes pays off quite well, but if you are late to the party, i.e., buy right before, or after the stock has peaked, the chances that it will surge again or offer better returns if you hold on to it for long enough are pretty low.
Since they are sort of a “trend,” you have to get the timing right to maximize your return potential with these meme stocks.
They might be targeted simply because they are heavily shorted or even if they are just undervalued. The reason itself matters little. What matters is how the market reacts to it and how a buying frenzy impacts the price.
Best Meme Stocks in Canada
The list of Canadian meme stocks is pretty short. There is one definitive (followed by the Wallstreetbets), one anticipated, and one “comparable” meme stock identified by Canadian investors.
We can consider another Canadian stock as meme stock, but only because a lot of hedge funds are betting against it. But there is a decent selection across the border. So, if you are open to adding US stocks to your portfolio, you will have a more comprehensive pool to draw from.
1. Blackberry Stock
Stock Exchange: TSX/NYSE
Blackberry is a “pure” meme stock. That’s because its short-squeeze was triggered by the same subreddit and the stock actually showed some decent-sized spike as a result.
It grew over 170% during one spike and about 67% in another. Another characteristic of Blackberry stock that you should consider is that it’s a great company that was fallen far from its former glory.
But it is evolving, and unlike many other meme stocks, this one actually has some long-term potential. And even though it’s a very long shot, if the company can reach its former (2007) peak sometime in the future, your investment would be worth a lot more in the future as well.
2. Tilray Stock
Stock Exchange: TSX/NASDAQ
It’s not a meme stock in a traditional sense, but many retail investors that target meme stocks have their eyes on this weed company, which became massive after combining with Aphria.
The stock has already seen an enormous spike: Over 690% from the end of 2020 to its Feb 2021 peak, and it has come down a lot since then. Meme stock or not, Tilray has explosive growth potential, especially if the US marijuana legalization bill passes.
3. Cineplex Stock
Stock Exchange: TSX
Cineplex can be considered a comparable meme stock because even though it wasn’t targeted by retail investors on social media platforms, a relatively similar stock was (AMC Entertainments).
Canadian investors believed that Cineplex could become the Canadian version of AMC since it’s going through the same trouble, i.e., the slow demise of the cinema. It’s a very risky bet, even as a meme stock.
4. Cameco Stock
Stock Exchange: TSX/NYSE
Cameco is on this list only because an expert identified it as a robust potential meme stock because it’s held by about 25 hedge funds (which is a step down from 30 a while ago).
I believe it has more to do with the asset Cameco represents, i.e., Uranium, and less with the company itself. And the same asset class ironically makes Cameco quite different from other meme stocks because it can be a powerful force for future growth.
Cameco is a giant in its industry, and whether you consider it a meme stock or something else, it’s worth holding in your portfolio.
This concludes the list of Canadian meme stocks. The “shorted” stock pre-requisite doesn’t work with Canadian stocks.
Some of the most heavily shorted Canadian stocks also happen to be industry leaders with decent performances and potential and don’t offer any other characteristic of a meme stock. So, the remaining articles on this list will be US-based meme stocks.
American Meme Stocks
I included this section as there wasn’t much choice for Canadian meme stocks alone. Here are some of the famous U.S meme stocks that started this trend
5. Gamestop Stock
Stock Exchange: GME
As the progenitor of the meme stocks, Gamestop deserves to be on this list of best meme stocks. It represents the explosive potential of meme stocks and is a better specimen than many that came after it.
At its works, the stock traded just under US$ 4 in 2020, and if you had bought into the company then, you would have grown your investment by almost 8,000% (at its peak).
So, if you had invested just US$ 500 in the company, you would have turned it into about US$ 40,000 in less than a year. That’s better growth than many cryptocurrencies offer.
6. AMC Entertainment Holdings Stock
Stock Exchange: NYSE
AMC entertainment was another stock targeted by the same subreddit, and thanks to a retail buying frenzy, the stock climbed up 1,400% between December 2020 and June 2021.
The company happens to be one of the largest movie theatre chains around the globe, which was a decisive competitive edge in the golden days of cinema, but it’s not anymore.
The short squeeze triggered by AMC becoming a meme stock gave it the push it needed to jump from a single-digit price tag to a decent two-digit one.
7. Naked Brand Group Stock
Stock Exchange: NASDAQ
One of the main reasons Naked Brand is on this list of meme stocks is that, like Blackberry, the stock has fallen quite far from its glory days. It traded at US$ 27,000 a share in 2013 and about US$ 1,420 a share in 2017, and now, it has come down to under one US dollar a share.
That kind of fall often spells a definitive death of the company, but it is expecting a merger. And if the company somehow manages to survive and starts riding “meme stock” winds, it has the potential to make its investors quite rich.
Why Is It Called Meme Stock?
Even if you understand the phenomenon of meme stocks, you might still be wondering why these stocks are called “meme” stocks in the first place? Though the etymology hasn’t officially been explored yet, the short and sweet answer to this question is this:
Memes are very commonplace in social media. Since most retail investors got wind of Gamestop and other meme stocks via social media, with people sharing news/views about them as frequently as they share memes, they got slapped with the name meme stocks.
Another perspective is that since they started from Reddit (a subreddit, more accurately), and that’s where most memes come from (it’s one of the birthplaces of meme and that’s where they start circulating around other social media platforms), it made sense to call them meme stocks.
Is Tesla A Meme Stock?
Yes. Even though Tesla is not a meme stock from the “short squeeze” perspective, it did reach new heights thanks to a lot of hype created in social media and many retail investors jumping on it.
The frenzy sent the stock shooting upwards from about US$ 42 in Aug 2020 to US$ 880 in Jan 2021. That’s almost 2,000% growth in less than a year.
Another reason why Tesla is a meme stock is that Elon is a disputed “meme king.” His tweets have already sent some investment assets through the roof, including Tesla, Dogecoin, and Signal stock (over-the-counter market).
And his aversion to Bitcoin due to environmental concerns became a significant force in bringing the mighty crypto down from its 2021 peak.
Despite the glaring conflict of interest, Elon’s social media power makes Tesla even more of a meme stock than others.
Should You Invest In Meme Stocks?
My personal take on meme stocks: I avoid them for the most part, and the noise surrounding them. To me, it’s too much of a gamble that isn’t based on what the value of a company is: the profits it produces for its investors. If you choose to invest in this route, tread carefully, as the investments will be extremely volatile.
It’s never a good idea to invest in something you don’t understand, but understanding meme stocks is not that hard. It’s not about a stock’s fundamentals and even how or why it has been targeted by social media.
Whether it’s about teaching short-sellers a lesson in humility or simply a meme-driven momentum (like what happens with Dogecoin), you just have to identify the trend and create a plan for following it.
The simplest way to safely invest in meme stocks would perhaps be the “Trend Following” strategy or approach to investment, formalized by Michael Covel. And it would go something like this:
You keep your finger on the pulse and keep observing the buzz around a stock, but you don’t buy unless you can see an upward momentum building. Similarly, once the buzz dies down, you don’t sell unless a downward momentum is definitive.
It won’t help you capture the best of a meme-“spike,” but you can make a decent profit in a relatively short amount of time than you would with a typical growth stock.
How To Buy Meme Stocks In Canada
My favourite and cheapest ways to buy stocks in Canada are:
|Wealthsimple Trade||$50 Signup Bonus|
|Questrade||$50 Free Stock Trades|
To learn more, check out my full breakdown of the best trading platforms in Canada here.
The phenomenon of meme stocks reiterates one of the essential facts about the stock market that investors often forget: Public perception is a powerful force.
Rallying retail investors have the potential to grow a stock way beyond what its financial fundamentals would allow it to.
But meme stocks are exceptions and not the norm. Still, if you have an extremely high-risk tolerance and you understand the risk, be on the lookout for the best meme stocks out there and see if you can capture their upside.