AMC, GameStop and Hertz: What’s Causing the Latest Meme Stock Swings?

·3 min read

Americans are fascinated by the stock market — and so-called meme stocks have captured a big part of that fascination.

Part internet in-joke and part get-rich-quick scheme, these are stocks of familiar-but-struggling companies that seem to catch small investors’ attention and, as a result, defy the normal financial laws of gravity. While meme stocks are a minuscule part of the overall stock market, small investors — often trading on popular apps like Robinhood — have sometimes added tens of billions of dollars in value to such companies that suddenly caught their fancy.

While this activity has created some overnight millionaires, it’s prompted big losses for some professional investors and small investors who bought at the wrong time, when the internet’s fickle attention span was about to move on. It’s also prompted plenty of questions from lawmakers and regulators.

Here are three of best-known meme stocks, and what’s been happening lately to their stock prices.

AMC

Movie theater chain AMC saw its business decimated by coronavirus-related lockdowns that shuttered theaters around the country. Many professional investors believe it also faces questions about its long-term financial viability as more and more Americans stream movies. Shares of AMC traded for as little as $2 last year, but began to gain steadily in early 2021, helped along by bullish small investors.

AMC really caught fire toward the end of May, when it jumped to $30, then $60 a share earlier this week. The company at first seemed to encourage meme stock buying, promising free popcorn to small investors. Then it backtracked, warning in a regulatory filing Thursday that investors should avoid the stock “unless you are prepared to incur the risk of losing all or a substantial portion of your investment.” On Thursday, AMC dropped back down below $40 before regaining some ground.

GameStop

GameStop is another familiar but struggling brand. Founded in 1984, the retailer operates more than 4,000 stores in 10 countries, selling video games and other electronics equipment. Its big problem: Today most video games can simply be downloaded over the internet, and many professional investors see the company eventually succumbing to the same fate Blockbuster video.

Despite (or maybe because) of professional investors’ disdain, GameStop became a favorite of traders in the Reddit forum WallStreetBets. They started a buying craze that sent the stock from less than $20 late last year to nearly $350 by the end of January. The seemingly random buying caused steep losses at some prominent Wall Street hedge funds, which had bet against GameStop stock. GameStop’s wild ride has only continued. By February it fell below $50, but recently interest has rekindled and it’s trading at about $250 now.

Hertz

The rental car company has been dubbed “the original meme stock.” Hertz filed for bankruptcy protection last May as coronavirus lockdowns squelched millions of Americans’ travel plans. Stock holders typically get wiped out during a bankruptcy, as courts order a business sold to a new owner and proceeds go to pay off bondholders and other lenders first. Therefore, professional traders were surprised to see small investors (no doubt familiar with Hertz brands but hardly experts in the nuances of bankruptcy law) started snapping up the company’s shares, often at prices of $1 to $2.

As The Wall Street Journal recently pointed out, the strategy seems to have paid off. The rapid pace of vaccinations and pent-up travel demand have dramatically improved the company’s financial prospects. Instead of losing everything, equity investors could reap $7 to $8 a share, according to the recent bankruptcy agreement.

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