How July's meme stock surge compares to 2021 — still a long way to go

CNBC

2 days ago

Meme stock mania has reemerged along with summer blockbusters, but some strategists and traders warn that this latest round of speculation and animal spirits is unlikely to reach its 2021 heights. Online real estate startup OpenDoor Technologies became the public face of this month's meme stock rally after hedge fund manager Eric Jackson, an investor in the stock, began hyping it on the social media platform X . Reddit-obsessed day traders have also piled into shares of well-known, household names GoPro , Kohl's and Krispy Kreme . OpenDoor has soared 332% in July, GoPro has more than doubled and Krispy Kreme is ahead 50%. The recent fervor for small cap, low-priced stocks with high short interest marks the largest resurgence in meme stocks — promoted on social media and in online communities — since 2021's GameStop mania, Bespoke Investment Group said in a note on Tuesday. "As shown below, using an index of the 100 most heavily shorted stocks Russell 1,000 stocks versus the Russell 1,000 itself, the over 52% 3-month gain in the former has outperformed the broader Russell 1,000 by over 30 percentage points. At the peak less than a week ago, that most shorted index was up closer to 60% with an over 40 [percentage point] spread versus the Russell. That is the widest spread since the 2021 meme stock mania," Bespoke wrote. But this time around, the meme stock frenzy may prove short-lived — and fail to achieve the heights of 2021. While it's hard to pin an expiration date on when the frenzy might subside, some signs indicate that the meme stock rally may already be on its last legs, said Paul Hickey, Bespoke co-founder. "Just the fact that there's been a lot of focus on it would suggest that we're probably closer to the end of it than the beginning of these stocks going crazy," Hickey told CNBC in an interview. "Once things are well-covered like this, you tend to be in the later stages than the early stages." Goldman Sachs echoed that view in a Wednesday note. "We flagged the momentum rotation and extreme rally in high beta names and lower quality pockets of the market, and we may be moving towards later innings of the short covering given the magnitude of these moves," the Goldman trading desk wrote. Bespoke also pointed out that the stocks with the highest short interest as a percentage of float — a key metric for a meme stock — were among those that performed worse during the selloff from the February highs to the early April lows. But the April bottom, these stocks have conversely delivered outsized gains. "In other words, the most heavily shorted stocks were both those that were hit the hardest during the first quarter's sell-off, and those same stocks have rallied the most off the lows. Given those outsized rallies, valuations in this pocket have gotten lofty," the firm wrote. Hickey told CNBC that this activity made sense given that market rallies tend to coincide with easier credit conditions, and the biggest beneficiaries of these easing conditions tend to be the stocks with the "shakiest fundamentals." "During market rallies like we've been having, you tend to see the lower quality stocks performing better. And some of these meme stocks tend to be the stocks that have the highest valuations and weaker fundamentals," he said. "Whereas during that period earlier in the year, from mid-February till early April, that was a weak market environment. And conversely, in weak market environments, the lower quality stocks tend to do worse."