Oh, the meme stocks…
A media frenzy …
Some love it …
Others hate it …
Regardless, the meme stock is a new phenomenon that has let the world witness the power of retail investors. Retail investors like you and I are using some old wall street tricks to gamble their way to overnight wealth possibly.
It all started when social media and the stock market investors met. After that, fellow individual investors found themselves with some free time during the pandemic to talk and trade stocks at a high volume. Starting with GameStop (GME), retail investors saw a possibility to 'short squeeze' the stock and benefit from the proceeds of betting against institutional investors who shorted the stock.
It's an old wall street trick but new to individual investors and entertaining enough to create a media frenzy. Not every stock can be a meme stock, though. And, despite the contrary belief, being a meme stock doesn't mean a lousy stock either.
Today, we are introducing you to our "Potential Meme Stocks" list of stocks so you can decide whether you can invest in meme stocks but still stay diligent and intelligent about it.
What is a short squeeze?
Before we start, let's clarify what a short squeeze is and how it is triggered. Short squeezing a stock means using all means possible to increase the stock price above the price that other investors have bet against. When the stock price surpasses that threshold, those who have previously bet against the stock (shorted it) have to buy the stock at the new price to "cover" their shorts, which means higher demand for the stock and a higher price for the stock. For a stock to rally due to a short squeeze, you'd need an external trigger to creates demand for the stock in the first place. A piece of good news or positive chatter online could be good examples. The online chatter and the appointment of a new Chairman of the Board were some of the reasons that led GameStop’s stock to short squeeze from barely $3 to reach a $420 value.
To be a meme stock, you'd need both ingredients: a short squeeze potential and an online chatter driven by retail investors. It's important to note that a stock can be a potential meme stock with the high possibility of a short squeeze, but if there is no external trigger (such as chatter online) to push the stock higher than the short price, the stock may never rally.
Now that we clarified the definitions let's get to our methodology to publish the Potential Meme Stock collection.
What triggers an online chatter about a stock isn't a straightforward answer. The Stock Card analysts team took three weeks to research every possible way to define it.
In the end, we narrowed down the criteria to be a potential meme stock to a few measurable data points that create the largest list of stocks with the potential to become a meme stock. Here are the main criteria:
The result is a list of 295 stocks that meet the basic criteria to become a meme stock. From here, it's up to the social media and retail investor community to trigger a short squeeze.
Get the Potential Meme Stock collection
Tip: How to invest in meme stocks?
Just because a stock is a potential meme stock doesn't mean it's a bad investment. Some potential meme stocks are future-shaping companies with strong operations that you may want to own for the long term. In those cases, you may get a chat to profit from the extreme volatility to buy shares of such companies at a good price.
Our CEO just recorded a new Daily Roll episode to talk about one meme stocks she owns despite the volatility. Check it out:
We've all heard meme stocks are risky. They truly are. In a short squeeze event, the problem is the gap between the company's valuation, including its future valuation, and its current stock price widens so much that there is no way to justify the price. By nature, a short squeeze is a short-term event. It's triggered by a sudden surge in demand that will not last. That's why meme stocks are extremely volatile. It's possible that a short squeeze stock to crash and never go back up. We have no control over external market triggers or the percentage of the shorted float for any individual stock. Therefore, sudden volatility and losing all of your money are not unreasonable outcomes of a meme stock investment.