Which Meme stock is the least risky?

The investment world has gone through significant changes over the past two or three years. One of the biggest changes was the addition of meme stocks. In this article, we used TipRanks’ comparison tool to evaluate two meme stocks – GME and BBBY. The two companies share many similarities. However, there is a critical difference between these two that makes BBBY more fragile than GME.

Investors should do their due diligence before diving into such volatile names. Unfortunately, many less experienced investors jump on the bandwagon when they see these meme names skyrocketing, often too late to make any money.

The extreme volatility of meme stocks can be a double-edged sword. On the one hand, investors can make millions of dollars in a single day investing in these stocks, but on the other hand, trying to capture such gains can be like trying to catch a falling knife.

A Brief History of Meme Stocks

Meme stocks are so volatile because of their cult followings, usually made up of retail investors who coordinate their purchases of these stocks on social media. Such steep rises and falls may look like a pump and dump system, but these movements lack the influence of a professional promoter who is paid to drive up the price of a stock.

Stock prices are not inflated for the purpose of defrauding other investors. Instead, retail investors seem keen to see how high they can take the stock.

Virtually any action can be categorized as meme action simply because chatter in an online forum suddenly picks up. In the case of GameStop, discussing it on the famous (and notorious, some would say) Reddit WallStreetBets forum started abruptly in August 2020.

Forum investors began gobbling up his shares, cheering each other on in the process and eventually triggering a short squeeze in January 2021.

Many or even most companies that capture the attention of the masses lack the fundamentals to sustain their price surges. For example, GameStop shares soared despite the retailer announcing plans to close 1,000 stores by March 2021. Another common trait of meme stocks is high short interest.

In addition to triggering a short squeeze, the crowd that inflated GameStop shares was also happy to cause pain for hedge funds. In a David vs. Goliath story, several hedge funds ran into serious trouble due to their large short positions in the video game retailer. At least one hedge fund required a bailout to avoid collapse due to the size of its short position.

GameStop

As is typically the case with meme stocks, GameStop enjoys positive sentiment among retail investors, but negative sentiment on news and bearish sentiment among bloggers. The retailer’s P/E stands at -23.4x.

A negative P/E ratio indicates that GameStop is losing money, which should be the first clue that it is in financial hot water. However, given Wall Street’s euphoric behavior in recent years, money-losing companies often have high stock prices, so further analysis is warranted.

GameStop suddenly surged on August 16, going from around $39 to nearly $45 per share in less than an hour. However, the action started reversing on the same day and is now in the $36 range.

It should be noted that GameStop management capitalized on the hype by performing a four-for-one split on July 21. In its most recent quarter, the retailer reported losses of $0.52 per share, or $157.9 million, on $1.38 billion in revenue. .

The consensus had suggested losses per share of $0.36 on $1.32 billion in sales, so the losses were much worse than expected. GameStop even lost money during the all-important holiday shopping quarter, posting losses of $147.5 million ($0.49 per share) on $2.25 billion in revenue.

Ultimately, it’s hard to find anything to like about GameStop. While bankruptcy doesn’t seem as imminent as it did before gaining meme stock status, the company is losing money at such a rapid rate that it’s hard to imagine it it still has many years to go without a major overhaul of its business model.

The only good news for GameStop is its balance sheet, which shows $1.035 billion in cash and cash equivalents with $617 million in debt (including lease obligations) and $1.67 billion in total liabilities. Retail investors gave the company so much money over the past two years that it was able to raise $1.68 billion by selling more shares to shore up its balance sheet.

GameStop tried to reinvent itself, starting with the addition of Chewy (CHWY) co-founder Ryan Cohen as chairman of its board of directors in June 2021. However, the future of the retailer is far from a certain thing, so at this point its valuation depends on the whims of the masses, this which makes it impossible to predict its price movement.

On Wall Street, GameStop has a moderate sell consensus rating based on zero buys, a hold, and a sell rating assigned over the past three months. At $17.50, GameStop’s average price target implies a downside potential of 52%.

Bed bath and beyond

Shares of Bed Bath & Beyond plunged more than 40% on August 19, erasing some of the gains they have enjoyed over the past month. The title has more than doubled in the last 30 days, and like GameStop, it has a negative P/E ratio, at -1.0x.

Bed Bath & Beyond is also bleeding money, posting losses of $357.67 million or $2.83 per share on sales of $1.46 billion for the last quarter ended. The consensus had called for losses of $1.39 per share on $1.51 billion in revenue.

Like GameStop, Bed Bath & Beyond didn’t even report a positive holiday quarter, as its February earnings report showed losses of $159.1 million or $1.79 per share on $2.05 billion. dollars in sales. Also, like GameStop, there’s not much to like about Bed Bath & Beyond either.

However, the video game retailer is actually in a better cash position. Bed Bath & Beyond’s balance sheet is anemic, with $107.5 million in cash and cash equivalents against nearly $3.3 billion in debt and total liabilities of $5.17 billion.

The retailer reportedly hired bankruptcy and restructuring law firm Kirkland & Ellis to tackle its debt problem. Moreover, it has taken no steps to try to rectify its situation as GameStop did in its planned transformation.

Unsurprisingly, Bed Bath & Beyond has a strong consensus sell rating based on zero purchases, one take, and 12 sell ratings over the past three months. At $3.84, Bed Bath & Beyond’s average price prediction implies a downside potential of 65.2%.

Conclusion: Meme stocks should probably be avoided altogether

If comparing the original meme stock to the new crowd favorite reveals anything, it’s that stocks that gain meme status should generally be avoided. It can be exciting to hitch a ride to the clouds, but investors who weren’t the ones driving the initial rally via social media should beware. The bottom can fall at any time, and if there is no money to cushion the company’s fall, investors will fall with it.

Disclosure

About Kristina McManus

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