Over the past couple of months, meme stocks have shown a sharp price increase. Some have risen in price several times despite the overall fall in the stock market caused by the release of data on rising inflation in the U.S. Retail investors massively bought shares of low-liquid companies, which led to a 2x-3x increase in the price of some stocks. Amidst this volatile market, investors who have such stocks in their portfolio should consider some meme stocks to sell before their potential drop.
Wall Street Armageddon: Meme Boom Is Back
The Nasdaq-100 index, which includes shares of the 100 largest non-financial companies listed on the Nasdaq stock exchange, has risen 14% since the beginning of the year after a 33% collapse in 2022. Notably, the biggest growth has been in the riskiest market segments, with money-losing software developers, crypto companies and meme stocks the leaders in this price rally.
Wall Street is concerned that Nasdaq-100 continues to rise despite the Fed’s statements. The Goldman Sachs index, which includes retail investors’ favorites, is up 11% over the past year. The resurgence of stock memes has coincided with an influx of retail investor money into the market. According to analytical company Vanda Research, the average daily inflow of funds into U.S. equities from retail investors reached a record high of $1.5 trillion a day in January.
And not only small companies are in play. The list of meme stocks also includes high-beta stocks such as Tesla (NASDAQ:TSLA) and MicroStrategy (NASDAQ:MSTR). These companies offer more risk and return than the underlying stock market and have doubled in value in the last 2 months. A wave of chaotic demand has also boosted dog-themed cryptos such as Floki (FLOKI-USD). Its price surged after Elon Musk tweeted a photo of his pet, reminiscent of the 2021 Shiba Inu (SHIB-USD) mania.
Is It Worth Investing in Meme Stocks?
Jim Smigiel, chief investment officer at SEI Investments, called the massive investments in meme stocks a “junk rally”, in which the lowest-quality stocks perform best. However, unlike the previous meme boom, what we are seeing now is more speculative and can quickly run out of steam. Back then, interest rates were at a minimum level and contributed to the growth of stock values. Now, the monetary conditions are much tougher. The Federal Reserve has raised rates by 450 basis points since March last year, to the highest level since 2007.
If you managed to buy a stock before the start of the rush demand, you can earn a good profit. But the probability of buying stocks at the peak is much higher than buying in a pre-bullish market. And it’s impossible to accurately predict where this peak is. To avoid such situations, it is best not to enter the stock when it has already doubled or tripled.
AMC Entertainment Holdings (AMC)
AMC Entertainment (NYSE:AMC) has recently behaved as a typical meme stock.
Shares in the largest U.S. film distribution chain saw a sharp drop in earnings due to the Covid-19 pandemic. Against this background, investors began to actively open short positions. At the same time, Reddit users started buying AMC to support the company suffering from speculators’ actions.
The market situation led to serious losses for short sellers. In parallel, Reddit participants purchased call options on AMC securities with the right to buy them at a predetermined price. Both of these phenomena led to explosive growth in AMC stock.
Still, despite showing a good performance in February, AMC remains in the meme stocks to sell category. AMC reported a doubling of quarterly losses to $287.7 million. The cinema operator has suffered a loss for the 14th consecutive quarter.
The reason why AMC is not yet profitable is that the theatre industry is still struggling. Box office revenue remains well below 2019 levels, as consumers continue to opt for streaming content at home. Other cinema chains have also seen their prices drop.
Carvana (CVNA)
Online car retailer Carvana (NYSE:CVNA) has nearly doubled this year. While its market value has increased by almost $2 billion, the company is still in debt. Its revenue growth has slowed down, and Carvana has yet to consistently generate profits.
Moreover, experts previously speculated about the company’s possible bankruptcy due to the significant decline in its shares in 2022. Although CVNA experienced a positive turn in 2023, its fundamentals have not changed. In its Q4 2022 report, Carvana did not make any announcements that would alleviate concerns about its future.
Carvana’s success during the Covid-19 pandemic, as consumers shifted towards online shopping, was a result of its business model. However, Carvana did not anticipate the headwinds of the used car market downturn, which could lead to a normalization of the automotive market. This, along with the high competition in the market and potential changes in interest rates, makes CVNA one of the potential meme stocks to sell.
Floki (FLOKI-USD)
The list of stock memes would not be complete without the youngest in the series of dog-inspired cryptos — Floki (FLOKI-USD). The prominent meme coin climbed over 67% from the previous day after Elon Musk tweeted a picture of his dog named Floki.
The great correlation of the coin with the Twitter news feed, and the posts of Elon Musk in particular, make FLOKI one of the most volatile cryptocurrencies on the market, with a currency volatility index of 13% according to Coincodex. Given the recent pump caused by just one of these posts, we should expect a dump of the coin in the near future. Moreover, unlike Shiba Inu and Dogecoin (DOGE-USD), FLOKI cannot boast of a strong technical side or solutions that can protect its price from the plummet.
On the date of publication, Julia Magas did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.