3 Things to Know Before Investing in the Latest Meme Stock

·6 min read
Money; Getty Images
Money; Getty Images

Meme stocks just won’t seem to go away.

The latest favorite of the Reddit crowd has been Bed Bath & Beyond’s stock, which soared as much as 365% between mid-July and mid-August. The surge was fueled by individual investors shortly after the retailer reported disappointing sales and replaced its CEO, and Ryan Cohen — chairman of meme stock favorite GameStop and CEO of the online pet supply retailer Chewy — announced he bought a big stake in Bed Bath & Beyond through his venture firm.

But the price, which rose from around $5 per share in July to $23 by mid-August, came tumbling down after Cohen sold all of his holdings in the company. (The stock price fell again earlier this week after it was reported that the company’s chief financial officer, Gustavo Arnal, died by suicide. Arnal, Cohen and others have been listed as defendants in a lawsuit accusing them of artificially inflating Bed Bath & Beyond’s stock price.)

The stock price sits around $7.50 per share as of Wednesday morning. It’s been a rollercoaster for the company — and for the investors who bought in to the meme stock mania.

Meme stocks as we’ve come to think of them first came on the scene in 2020, when an army of everyday traders teamed up on Reddit to wage a war on Wall Street while trying to get rich themselves. The retail investors collectively pumped up the stock price of video game retailer GameStop, which had recently been suffering from layoffs and dwindling sales, and had caught the attention of short sellers (institutional investors like hedge funds that bet on a company’s share price dropping).

The narrative that the everyday investors won that battle has been contested, but what can be said for sure is that meme stocks — like GameStop, but also AMC, Hertz and now Bed Bath & Beyond — haven’t disappeared.

Are meme stocks good investments? What to know

If you have FOMO around meme stocks, that’s fair. But here’s what you should know before you invest.

Meme stocks are volatile and risky

Investing in meme stocks is no smooth ride.

Since the beginning of 2020, Bed Bath & Beyond’s stock price’s standard deviation — a metric Morningstar Direct uses to measure volatility, which basically looks at how widely the stock’s returns have varied over the period — has been 122.7% as of the end of August, compared to the S&P 500’s 20.5%. And GameStop’s has been a whopping 998.4%. In other words, these stocks’ prices fluctuate dramatically, which makes them extra risky for investors.

But it’s not just meme stocks that are volatile. In general, individual stocks have way more ups and downs than funds that spread risk across a broad array of securities, even if they don’t get the same meme stock fanfare as GameStop, AMC and others. Here’s a non-meme-stock example: Over the last 10 years, Amazon stock’s standard deviation has been around 30% compared to 14% for the S&P 500.

As they say, don’t put all your eggs in one basket.

The fundamentals aren’t there

You’ve probably heard that investors are supposed to look at the fundamentals before deciding where and when to invest. What this means is that as investors consider their options, they should analyze fundamental data on the forward-looking outlook of underlying earnings of companies, as well as inflation, interest rate hikes and more.

Ever since its inception, the stock market has been one of the greatest synthesizers of this kind of data into an expected outcome, says Matt Kocanda, a partner at wealth management firm CI BDF Private Wealth.

“Put that all into a hopper and you end up with a price,” Kocanda says.

But meme stocks, he says, are trading without any of that fundamental backing.

“It’s more so with the masses coming together and joining forces to say ‘let’s drive up the price,'” Kocanda says. “It’s hard to fundamentally value that because there aren’t earnings behind that, there isn’t a product line, there isn’t a strategy that is forcing this up and down.”

Plus, you don’t know when the sentiment around a meme stock is going to shift, he adds.

Getting rich off meme stocks is harder than it looks

Social media is full of people claiming to have gotten rich off of meme stocks and other risky investments like cryptocurrency. One 20-year-old college student got a lot of attention in August for making a $110 million profit by betting on Bed Bath & Beyond’s stock.

As tempting as it can be to try to cash in on meme stocks, remember that for the most part, these big winners are the exceptions, not the rule.

“Everyone wants a get rich quick scheme,” Kocanda says. “[But the investors] that we see have a really successful financial plan are those that set a strategy, they’re disciplined to it and are patient.”

How to invest in meme stocks

Despite all this, if there’s an itch to get in on the meme stock action, you can scratch it. But you need to do so only with an appropriate portion of your portfolio.

Financial advisors tend to recommend only investing money you can afford to lose in risky assets like meme stocks.

“The bottom-line advice I give clients if they are inclined to invest in something speculative like this is to limit the investment as a percentage of their portfolio, i.e. 1-2% ideally but no more than 5%,” Kevin Brady, vice president at Wealthspire Advisors, tells Money via email.

And because meme stocks are so volatile, if you are lucky enough to make substantial gains from them, you should be sure to sell and take some profits off the table, says Brian Schmehil, managing director of wealth management at The Mather Group.

“Whatever you do, don’t invest your whole nest egg in meme stocks,” he adds.

While meme stocks and other risky investments may be exciting, a long-term approach to investing that aligns with your risk tolerance and goals and includes a diversified portfolio is much more likely to help you build wealth.

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