The biggest investment story of 2021 must be the incredible returns from ‘meme stocks’. The popularity of these stocks on forums such as Reddit have driven their prices to unbelievable heights. Thus, market veterans have repeatedly issued warnings about these sky-high shares. But investing in meme stocks has worked brilliantly this year — so far, at least.
BANG go the meme stocks
Amusingly, the initials of four popular meme stocks form an appropriate acronym: BANG. These four shares are BlackBerry, AMC Entertainment Holdings, Nokia Corp, and GameStop Corp. It’s also notable that these companies form matched pairs. BlackBerry and Nokia, both pioneers in mobile telephony, have fallen on harder times. Meanwhile, cinema chain AMC and video-game retailer GameStop both provide screen-watching entertainment.
Although these meme stocks share similarities, their returns have actually been very widely dispersed. Here’s how each share has performed over six months:
Blackberry +71% | AMC +2,337% | Nokia + 36% | GameStop +1,004%
Again, these meme stocks pair up, but this time by returns. BlackBerry and Nokia have produced high double-digit returns since 7 January 2021, easily beating the S&P 500 index. But the truly staggering returns have come from GameStop (an 11-bagger) and AMC (a 24-bagger).
The maximum potential returns are astonishing
What’s absolutely unbelievable is how much traders could have made by buying these meme stocks at 52-week lows and selling at 52-week highs. This table shows how much incredibly lucky (or skilful) investors could have made in each of the four BANG stocks:
Once again, these meme stocks pair up by potential returns. A perfect trade would have tripled one’s money in Nokia and produced more than a six-fold return in BlackBerry. But a perfect low/high trade in AMC would have returned 38 times one’s money, while the same luck with GameStop would deliver 128-fold returns.
For me, two BANG stocks are doomed
If you put a loaded gun to my head and ordered me to buy two BANG meme stocks, I wouldn’t hesitate for a second. I would buy Nokia and (very reluctantly) BlackBerry. That’s because, though these shares look fully priced to me, they don’t trade at insane multiples of sales, profits, or earnings. That’s more than I could say for AMC and GameStop — two businesses both facing very strong headwinds.
When I look at AMC and GameStop, I’m reminded that ‘money moves markets’. Intense waves of momentum-following money has flowed into these two meme stocks over the past six months. But this flood of buy orders will do nothing to improve the future prospects of either company. AMC had a disastrous 2020, thanks to cinemas being closed during lockdowns. But its sales growth was also flat in coronavirus-free 2019. Likewise, GameStop is a bricks-and-mortar retailer in a world moving inexorably towards digital and online sales. Its revenues also declined steeply between 2016 and 2019. For me, trading in AMC and GameStop will continue to be very risky, difficult, and even dangerous in 2021/22.
Of course, I could be wrong. AMC and GameStop could stage miraculous recoveries through soaring sales growth in a post-pandemic boom. Likewise, new strategies or leadership teams could set both groups on paths to brighter futures. But I wouldn’t bet even a penny from my portfolio on this actually happening!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended BlackBerry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.