“Meme stocks” like AMC Entertainment have fallen hard after their stunning rise in early 2021. Risky stocks have taken a beating recently as investors worry about rising interest rates. Julian Emanuel of Evercore says meme stocks could rally as investor sentiment recovers. The journey “to the moon” seems to have stopped a little bit short.
Whether the meme stock moment of 2021 was an uprising, or a fad, or a money grab is a matter of opinion that will never definitively get settled. But aside from a few newly-rich investors and perhaps some badly-burned hedge fund managers, most people on Wall Street have moved on.
The prices of the former meme stocks prove it — most of them have suffered tremendous declines over the last year. The fact that many investors have grown risk-averse and are now clamoring for value stocks in the financial and energy sectors instead of hot technology investments has only made it worse.
But the story doesn’t necessarily end there.
“Emotions are fickle, generally detrimental to investors, more so during times of high volatility ,” wrote Julian Emanuel, who leads Evercore ISI’s equity, derivatives and quantitative strategy team. “Could the same meme/concept/profitless stocks now heavily shorted and universally reviled, topped in 2021’s triumph, be set to rally in 2022’s Fear and Loathing?”
The meme stock comebackEmanuel notes that stock market surveys show that investors are even more pessimistic now than they were in early 2020, when COVID-19 was beginning to upend life around the world and throw the global economy into a sharp recession .
Emanuel writes that when investors are that pessimistic, it’s often a great opportunity to buy stocks. He says the ongoing round of earnings reports and the strong economy should help steady Wall Street’s mood.
He compares the present moment to early 2016, a period when investors were also bearish.
“January 2016’s abject despair, similar to today’s, catalyzed a near uninterrupted 2 year 59% rally whose initial leg was led by the then-hated Energy and Small Cap stocks,” he said.
If things settle down and investors conclude they’ve gotten too bearish, he suggests, they’ll find that some of these meme stocks have turned into notable bargains. That’s because they’re not only cheap, but in many cases, a lot of investors have bet against them in the form of short positions.
That’s a new version of the same dynamic that sent some meme stocks skyrocketing in the first place. When retail investors got together and start pushing the stocks higher, they set “short squeezes” in motion that pushed other investors to buy the stocks to close out their failing short positions.
The results were spectacular at times. While Emanuel isn’t predicting moves that are as dramatic as last year’s meme stock rally, it’s possible that investors who want to play “diamond hands” are going to have a chance.
The following stocks are down at least 50% from their peaks early last year, and the short interest against them is at least 10% of the size of the overall share float.
“Such stocks could be positioned to do a 180 degree turn should “cooler heads prevail” in the weeks ahead,” he said.
The companies are ranked from lowest to highest based on how far they’ve fallen since early 2021. Figures were calculated as of January 30.