While GameStop led the meme stock movement a year ago, today it's gains actually trail that of Bed Bath & Beyond and AMC, indicating that it might not be the focal point of the Wall Street Bets traders that it was early last year. The stock also trailed its meme stock peers on Friday, gaining only 4.3% in the previous session compared to double-digit gains for Bed Bath & Beyond and AMC.

What happened

Shares of GameStop (NYSE: GME) were rising today as part of a broader two-day rally in meme stocks, including AMC Entertainment Holdings (NYSE: AMC) and Bed Bath & Beyond (NASDAQ: BBBY). 

There was no particular news out on the video game retailer today. Instead, traders on Reddit's WallStreetBets teamed up to push the stock higher in a move reminiscent of GameStop's massive gains early last January.

As of 2:44 p.m. ET on Monday, the retail stock was up 8.1%.

So what

GameStop traders are trying the same play again. On WallStreetBets, traders are talking up GameStop and piling into the stock after shares have fallen back down to earth after a dramatic run-up last year.

GameStop stock is also not as heavily shorted as it once was. As of July 15, 22% of the float is sold short, meaning a substantial (but not overwhelming) percentage of investors are betting on the stock to fall.

Now what

Ironically, GameStop's meme bounce is coming at the same time as a sector slowdown in gaming. The NPD Group reported that consumer spending on video gaming fell 13% in the second quarter, and today, NVIDIA (NASDAQ: NVDA) stock fell after the chipmaker issued a disappointing second-quarter forecast due to a shortfall in gaming revenue. The video gaming industry was a big winner from the pandemic, so those headwinds are only natural as the pandemic effects fade.

GameStop stock rallied last year in part because Chewy Inc. (NYSE: CHWY) co-founder Ryan Cohen had begun accumulating a stake in the company, and he later joined the board, pushing the company to move deeper into e-commerce and areas like non-fungible tokens (NFTs). Though GameStop posted modest revenue growth in its most recent quarter, the company's losses actually widened, casting doubt on any potential turnaround.

While the stock could continue to rally with help from the WallStreetBets crowd, the fundamental case seems thin at this point.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Defining a meme stock

A meme stock is typically regarded as a stock that lacks fundamental backing and is, more so, driven in popularity by hype. Usually, it is retail investors that drum up support for these stocks using social media channels such as TikTok and Reddit.

Once this type of stock 'goes viral', the resulting extreme share price jumps can attract even more investors as the fear of missing out (FOMO) kicks in. This momentum can then lead to a stock price that is divergent from all fundamental measures of analysis. As a result, many commentators see the valuations as humorous – thus, a meme stock is born.

Be warned – meme stocks are not for the faint of heart. The irrational speculation surrounding them is usually paired with violent volatility. Take GameStop Corp (NYSE: GME) for example. The gaming retailer's stock price increased nearly 25% between 4 June to 9 June. Then it proceeded to fall 27% the very next day.

What's all the hype about?

Meme stocks really came to prominence with GameStop. What originally began as a WallStreetBets led short-selling squeeze turned into a full retail investor onslaught. Since then, the attention has spread to several stocks that are heavily shorted – including BlackBerry Ltd (NYSE: BB), AMC Entertainment Holdings Inc (NYSE: AMC), and Bed Bath & Beyond Inc (NASDAQ: BBBY).

The reason many are now talking about these types of shares is because of the potential returns. While the risk is extreme, some speculators cannot dismiss the possible gains on offer. For instance, the US-based movie theatre chain AMC Entertainment has returned 2,837% so far this year. While the valuation may look like a joke, for those who managed to achieve them, the returns are certainly no laughing matter.

However, the catch is, to really capture the upside, you must be among the early speculators. Once a stock reaches the late or FOMO phase, it's often too late. Because of this, many speculators are constantly on the hunt for the next GameStop or AMC…

Foolish takeaway

When it all boils down, meme stocks are extremely high-risk 'investments'. While they may seem like a joke to some, for those left holding the baby when the momentum swings the other way, it can all end in tears.

The stock market is often full of distractions. The potential 'get-rich-quick' investments are often seductive – but unless a company's fundamentals catch up with its share price, it can very easily all come tumbling down.

Lastly, many experts argue that building wealth via the stock market is best done by utilising the power of compounding. It may not be the most exciting way, but it's the easiest way to ensure the stock market doesn't make a meme of your finances.

The post What is a meme stock, and why is everyone talking about them? appeared first on The Motley Fool Australia.

Forager Funds chief investment officer Steve Johnson said this week that share markets had "a crazy first quarter".

"You're not seeing dramatic moves in the overall index levels, but some of last year's really big winners have been hammered so far this year."

He told the Forager video that currently, it wasn't uncommon to see a share price rocket up 100% then get hammered down 50% within a few weeks.

"This sort of market activity, it does worry me and it makes me nervous."

An example of the craziness

Forager analyst Chloe Stokes named retailer Stitch Fix Inc (NASDAQ: SFIX) as an example of the vomit-inducing ride some stocks have endured.

"During COVID, the share price was down as low as US$11. And then back in December, it was trading at US$35 before they released earnings for their first quarter."

The quarterly results were "pretty impressive", according to Stokes.

"They had good revenue growth and good guidance and a lot of growth in new customers. The stock rose very significantly on the day and continued rising over the next 2 months. It got as high as US$113 at the end of January."

But from that peak, the stock started tumbling, apparently for no significant reason.

"And there was another significant dip when they released their second quarter earnings, where revenue growth wasn't quite what the market was expecting, and they lowered their guidance for 2021."

Stitch Fix shares now trade for US$46.86.

"The stock is now less than half of what it was… We were kind of loosely interested in the stock back before the crazy price rise. And it's getting to the levels where we might start looking at it again."

Rollercoaster rides make Johnson sick

According to Johnson, investors should be worried because "there's a lot of stuff going on under the surface" currently in the market.

"It is not normal for large numbers of stocks to be doubling and then halving," he said.

"I think you're seeing a lot of leverage, like these [collapsed] hedge funds that we've seen. I think a lot of retail leverage as well, which is a fairly new phenomenon of people being able to buy options and CFDs and things at a retail level."

Social trading, which really came into public consciousness during the GameStop Corp (NYSW: GME) blow-up in January, is also contributing to the chaos.

"Anyone that's seen the Wolf of Wall Street knows about the 'pump and dump', where you create this excitement about a stock and then sell your stock into it… These new social media platforms like Twitter Inc (NYSE: TWTR) and Reddit have created the ability to do that on a scale that we haven't seen before," Johnson said.

"It's got me quite nervous that these are not isolated incidents. They're all related to the same thing."

Buying opportunities

Stokes took the alternative view that the volatility of some stocks has presented investors with golden buying opportunities.

"From my perspective, it's been great. It's meant we could buy Farfetch Ltd (NYSE: FTCH) back below US$20 in June last year, we sold it above US$60, and now we're getting a chance to buy it back again at significantly lower prices."

Stokes' team also doubled its money in a few days in January when its Bed Bath & Beyond Inc (NASDAQ: BBBY) holding got indirectly caught up in the GameStop furore.

The post 'It makes me nervous': Expert worried about 'crazy' market appeared first on The Motley Fool Australia.

Forager Funds international shares fund portfolio manager Gareth Brown and analyst Chloe Stokes gave an update to clients this week that would have made them all smile.

No, the fund didn't own GameStop shares before they rocketed up.

Their story was how the short squeeze super-charged a more conventional stock pick that they made.

It was all about the journey of US retailer Bed Bath & Beyond Inc (NASDAQ: BBBY).

This company was heavily shorted, just like GameStop.

"One of the stocks highest on our to-do list was also one of the market's shorted stocks, with more than 60% of its outstanding shares sold short," said Stokes.

This was because the homewares chain had been in deep strife in recent times.

According to Stokes, Bed, Bath & Beyond had an overpaid management team that had neglected to get on the e-commerce wagon and the industry trend towards own-brand products.

"Add the expected cash burn from COVID-impacted sales, and many bears expected the company to go bankrupt."

Why was Forager interested in a dud stock?

Stokes told clients that 2 years ago a group of activist investors dragged the company into the 21st century.

"Since then we've had a complete board and management team overhaul," she said.

"And many of the new hires had experience with business transformation and operating omni-channel businesses."

Bed, Bath & Beyond's online presence ramped up, non-core businesses and assets were sold off and debts repaid.

"In the most recent quarter, 31% of the company's sales were online, and it should be even higher than that in the next quarter."

Stokes and Brown's team felt that the bear case had now eroded considerably. With the share price still pretty low, they judged that it now had "almost 100% upside".

How GameStop triggered a Bed Bath & Beyond windfall

But as they were thinking about the case, the GameStop saga exploded.

This was because the hedge fund that was devastated by the GameStop short squeeze, Melvin Capital, also had a huge short position on Bed Bath & Beyond.

Melvin would likely have to liquidate some holdings to survive. If Forager was to buy in, they didn't have much time.

"We had to work really really quickly. There was massive short interest in a market where everyone was suddenly taking notice of that," said Brown.

"We need to hurry up because [Melvin] might need to close out their position in a hurry, which means they have to buy stock. The stock skyrockets, we miss our opportunity."

Stokes said Forager managed to buy Bed, Bath & Beyond shares about "10 days ago". This would have been around 20 January when it was priced around US$25.

A few days later, the GameStop short squeeze hit the fan. 

As Melvin Capital was sent broke, just as Forager predicted, it had to buy Bed, Bath & Beyond shares to cover its short positions. 

"The stock has doubled," said Stokes.

"So it's hit our base case estimate in just 10 days."

At the height of the GameStop mania last week, Bed, Bath & Beyond shares hit US$53.90.

The higher the price went, the riskier it became to hold onto the shares – so Stokes' team quickly sold off to lock in the profits.

Brown admitted this isn't the usual way to make money.

"It's really hard to grumble about doubling your money in a couple of days," he said.

"[But] we feel more comfortable when an investment thesis takes a year or two to play out."

The share market is currently in "a very, very unusual" state and many of Forager's recent purchases have "worked out blisteringly quickly".

"Others that we've been looking at and hoping to buy have skyrocketed before we've had the chance."

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