Meme stocks are transforming the market thanks to Reddit traders. Here's what it means to be a meme stock - and why they're viewed as a whole new asset class.

Meme stocks are transforming the market thanks to Reddit traders. Here's what it means to be a meme stock - and why they're viewed as a whole new asset class.
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  • Meme stocks are becoming harder to define as more and more are added to the basket.
  • But a few things are true: they have a big social media following and opportunity for price movement.
  • Meme stocks are a form of "social uprising," said one market strategist.

Ever since retail traders drove a record rally in shares of GameStop earlier this year, a new term has emerged on Wall Street.

Meme stocks.
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The term - used as a catch-all to talk about a group of companies that have seen their stock surge since the GameStop craze - has left some scratching their heads as to how, or if, they can be defined.
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Matt Maley, chief market strategist for Miller Tabak + Co., said the definition is "very broad," and it's becoming even harder to define.

This week alone retail traders added a bevy of new names to the list. The term, which once described a handful of companies including GameStop, AMC Entertainment, BlackBerry, and Bed Bath & Beyond, has ballooned in recent weeks to new names. Some, like Beyond Meat and Wendy's, are well-known, while others, like Cleveland Cliffs, Clean Energy Fuels, ContextLogic, and Invesco Mortgage, are more obscure.

Among the names new and old, Maley said one thing is for sure: meme stocks are generally "out-of-favor stocks" on Wall Street.
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Travis Rehl, the founder of Reddit investing tracker HypeEquity, said it's a little more than that. Meme stocks, unlike other equities, aren't governed by the company's fundamentals or technicals. "They're governed by nostalgia or interest or a common connection," he said.

Once there's a community connection - such as Millennials' nostalgic attachment to growing up with GameStop as a local fixture - then there has to be opportunity in the stock, and that opportunity has to materialize. "If those three things line up, you submit yourself as a meme stock," Rehl said.
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Darren Schuringa, CEO and founder of New York-based ASYMmetric ETFs, said meme stocks are defined by their followers.

"It is the amount of people that are following and talking and communicating on a specific stock," he said. The social-media savvy followers leverage online forums to gain steam around certain stocks quickly, he said.

As for the stocks themselves, they're generally riskier bets. "A lot of what I see is speculation," he said. "That is another characteristic behind this stocks is this is a way I'll get rich quick."
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Not always a short squeeze

The GameStop episode in January was defined by the so-called short-squeeze. Under the right conditions, Redditors found that certain stocks with high short interest, mostly from hedge funds, could be "squeezed", making it costly for the short sellers while also driving up the price of the shares as they close out positions to cover losses. Both GameStop and AMC were heavily shorted stocks, and high short interest became an early defining feature of meme-stocks.

But it isn't always about the short-squeeze, Rehl said.

Since the GameStop frenzy in January, retail traders have largely scared away short sellers from the small- to mid-size companies often targeted on forums such as Wall Street Bets. According to Barclays data, the number of companies with a short interest of 30% or higher has declined from 43 to 18 since January.
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"I think there's too much focus on everything wanting to be a short squeeze," Rehl said, adding that oftentimes Redditors don't care about the short-squeeze potential.

Compared to GameStop and AMC, which have a 21% short interest, many newly added meme names have much less short interest.

Fast-food restaurant Wendy's, which was added to the meme-stock bucket this week, has just a 4% short interest rate. And Cleveland-Cliffs, an Ohio-based iron-ore mining company, and Clean Energy Fuels have a 9% and 7% short interest rate, respectively, MarketBeat data show.
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But some, like Chamath Palihapitiya-backed Clover Health and plant-based meat-maker Beyond Meat are like the original meme stocks: an opportunity to squeeze short sellers. Clover has a 36% short interest rate, and Beyond has a 25% rate, according to MarketBeat.

A social uprising

The meme-stock movement may remain a fixture on Wall Street. Rehl, a Millennial Reddit investor himself, said it's a new asset class that is likely to stick around.
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"As long as people are allowed to gather in public places in mass and talk about what they're interested in, I think it is here to stay," he said.

Schuringa said meme stocks are a social and behavioral phenomenon linked to social media and a healthy distrust of Wall Street, and not necessarily their own asset class.

"It's more of a social uprising in challenging the status quo and the norms, and that's not a bad thing," he said.
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Meme stocks, he said, have fundamentally changed the marketplace, and they aren't going anywhere.

"The retail investors are showing themselves to be a force in the investing community that can mobilize relatively quickly a lot of capital and dramatically influence stock price movements and that's new," he said, "And I think there's a respect for that."

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