Explainer-What is behind the latest rally in meme stocks?

Yahoo

5 days ago

By Johann M Cherian
(Reuters) -Retail investors are once again banding together to bet on highly shorted loss-making companies such as Kohl's and Krispy Kreme this week, bringing to mind the "meme stock" frenzy that gripped Wall Street four years ago. The spotlight this time around is on online real estate platform Opendoor Technologies, struggling department store operator Kohl's, donut chain Krispy Kreme and action camera maker GoPro.
Here is what you need to know about the latest rally.
WHAT TRIGGERED IT THIS TIME?
Some market participants have attributed the rally to bullish posts from EMJ Capital portfolio manager Eric Jackson on X.com last week. Jackson said his hedge fund has built a long position in Opendoor, projecting the stock to hit $82 in the longer term.
Traders were quick to target the stock, pushing it 300% higher so far this month.
Its shares hit a record low of 50 cents just last month, having shed more than 90% in value since its peak in 2021. The company has racked up losses in the past 11 quarters.
Retail investors have been emboldened by a sharp recovery in U.S. stocks to all-time highs as investors looked past President Donald Trump's chaotic trade policies to bet on a healthy economy and interest rate cuts from the Federal Reserve.
Easing U.S. trade tensions, with top trade partners such as Japan, have also helped risk appetite.
STOCKS CAUGHT IN THE LATEST FRENZY
Krispy Kreme, GoPro, Kohl's and Opendoor are among a few stocks that are caught in the amateur trading frenzy, fueled by social media posts on X.com, Reddit and Stocktwits.com.
These stocks have significant bearish positions, leaving short sellers singed as they roared ahead, causing what is called a short squeeze.
Short interest is at 14% in Krispy Kreme and 8% in GoPro, according to data compiled by LSEG, while bearish positions on Kohl's and Opendoor were at 47.3% and 18.6%, respectively.
At the same time last year, Keith Gill's posts on social media were a major trigger for the frenzy into stocks such as GameStop and AMC Entertainment.
WHAT IS A MEME STOCK?
A meme stock is a moniker for a company whose shares get a boost when retail traders rally around it on platforms such as Reddit, stocktwits.com and X.com to trigger a short squeeze.
These companies have high short-interest because of their weak fundamentals and loss-making nature, but meme stock traders love them for their cheap stock price.
The frenzy first burst into the open during 2021 when COVID-19 lockdowns boosted savings, policy stimulus put cash into people's pockets and extremely low interest rates pushed investors to the stock market.
A proliferation of zero-fee trading apps also encouraged anyone with a smartphone to dabble in stocks.
Thousands of Reddit users on low-cost trading platforms such as Robinhood banded together to drive up the prices of these stocks, squeezing hedge funds that had taken short positions, or bets against those shares.