Meme vs. Story Stocks: Decoding the Hype Behind Your Investments
Have you ever heard of a “meme stock”? Name one that comes to mind as an example? What now if I asked you to think of a “story stock”? Ever heard of one of those? Do you have any examples that come to mind? The other day I suggested to my wife that we watch the movie Dumb Money, but when she asked me what a “meme stock” was, I found myself getting more and more skeptical of my explanation as I bumbled along trying to explain the concept because I did not just want to give her examples.
The Meme vs. Story Showdown:
Story stocks: Think of them as the charmers of the market. Their prices are swayed by juicy narratives, whispers of future greatness, and headlines promising moon-landing returns.
Meme stocks: Now, these guys are the party animals of the market. Fueled by online communities and viral hype, they're more about the "YOLO" attitude than meticulous analysis. Remember GameStop? That's the meme stock poster child propelled by social media buzz and short squeeze drama.
But wait, isn't it all just a story? It was at this point that it occurred to me that the line between meme and story stock is razor thin. Thinking it was my lexicon that needed a reboot, I went to the internet, my favourite firehose to drink from to quench my thirst for knowledge. I will let you be the judge as I reference Investopedia
“Story stocks have prices that are greatly influenced by investor sentiment related to future developments, anticipated outperformance, or positive headlines.” This was just the key takeaway, for the full definition. I suggest you read from the source right here.
“Meme stocks are shares of companies around which online communities have formed to promote and build narratives.” For more on the meme stock definition I suggest you go to the Investopedia website.
I don’t know about you but I am not left feeling clear about how to distinguish one from the other. At the end of the day, a meme stock and a story stock both rely on narratives. Most will connect the dots if I mention the GameStop story. A confident person who knows the story would argue that it started as a viral meme, fuelled by short squeezes and Reddit warriors. Wall Street Bets and Diamond Hands also come to mind. A closer look though reveals a deeper story…
It was Game On with GameStop :
Most of us caught the tail end of the GameStop flair up in January 2021, when in the week starting January 11 2021 the stock went up 100% in one week of trading! The stock price closed that week at $8.88 (today it is at $14.49) but there’s a lot beneath the surface.
The GameStop thesis for why there was opportunity for the price to pop was actually quite smart. See below from Investopedia;
“The YouTube persona Roaring Kitty posted a future (?) viral video laying out the case for why shares of brick-and-mortar video game retailer GameStop Corp. (GME) could soar from $5 to $50 per share in August 2020. In the video, he explained that the stock had among the highest short interest in the market, largely with short positions held by hedge funds—and that these funds would need to cover their positions in the event of a massive short squeeze, driving the stock much higher.”
Roaring Kitty’s real name is Keith Gill and he was not taking a position based on the fundamentals. He was looking to exploit short sellers (getting over their skis) unnecessary and being vulnerable in having too big an exposure relative to the stock float available to buy and sell. Roaring Kitty was talking about his thesis in August 2020, a month when the stock opened trading at $1.01 and there was no real meme story buzz yet. I only knew about the Roaring Kitty story well into 2021, when the meme story tag had become a thing.
I had come across GameStop at the end of October (or early November) of 2020 after listening to Jim Gillies on the Motley Fool podcast discussing GameStop with Emily Filppen.
Jim Gillies made what for me was a very interesting investment case
Activist investors, namely several prominent investors with successful track records had taken significant stakes in GameStop, including Ryan Cohen (Chewy founder), Michael Burry ("The Big Short"), and Donald Foss (subprime auto finance). This indicated potential for positive change and value creation.
A short squeeze potential: High short interest (over 100% at one point) creates the possibility of a rapid price increase if good news triggers short covering. At the time this part made the least sense to me given my knowledge.
Strong financial position: GameStop had more cash than debt and could generate significant cash flow during the upcoming console cycle. This was the part of the story that resonated with me the most as Jim put forward a console cycle which I was not even aware of.
In short, Jim Gillies was saying at the time that from a fundamentals perspective, GameStop was not a Blockbuster (the video rental business that had their lunch eaten by Netflix). Jim Gillies was arguing that GameStop was a value investment.. GameStop had significantly better financial strength, and by implication a fundamental story to go with its business model.
More cash than debt: Unlike Blockbuster, which was drowning in debt at the time of its bankruptcy, GameStop had significantly more cash on its balance sheet than debt. This provided a financial cushion and flexibility that Blockbuster lacked.
Positive free cash flow: GameStop was generating positive free cash flow, which meant it was able to cover its operating expenses and still have money left over for investments or debt repayment. Blockbuster, on the other hand, was burning cash rapidly.
Perspective check
GameStop is dubbed as the first meme stock if you followed social media and the news feeds. However, for those that had listened to the Motley Fool podcast which was aired at the end of October 2020, GameStop was a story stock, where there was a fundamental investment thesis that was sound.
"Story" stocks may have solid fundamentals, although the narrative often overshadows financial data. “Memes”, on the other hand, often lack strong fundamentals but thrive on pure sentiment and community excitement. This distinction isn't always clear-cut, and individual cases can exhibit shades of both, and GameStop, the first meme stock sits squarely in that muddy water for me.
It is nuances like this that drive me to prefer to look under the hood, and go beyond labels with investing (or even trading). My approach is always the following:-
Question the Hype: Regardless of the label, scrutinize the underlying story. Investigate the company's financials, leadership, and competitive landscape. Are there sustainable factors driving growth, or is it pure hype?
Consider the Motive: Who benefits from promoting the narrative? Short-sellers might create negative narratives to drive down prices, while pump-and-dump schemes often inflate meme stocks artificially. Be wary of agendas hidden behind the narrative.
Focus on Value: Ultimately, invest based on your own risk tolerance and research, not trendy labels. Ask yourself: "Does this company's story align with my investment goals, and can I handle the potential volatility?" There is a reason I am not a Tesla shareholder. In my post, The Allure and Perils of Elon Musk, I explain my investment experience with Tesla and when I think about it, if GameStop is the first meme stock, then Tesla is the king of meme stocks.
Further Exploration:
Case Studies: Analyze past "meme" or "story" stocks, both successes and failures. Understand what fueled their rises and falls, and identify commonalities to inform your own investment approach. As an example, Draft Kings came to market as a SPAC, but unlike the rest of the SPAC mania stocks Draft Kings is up 246% from its October lows of 2022. In fact Draft Kings is outperforming the S&P 500 since listing as a SPAC.
Alternative Frameworks: Explore alternative ways to categorize stocks beyond these labels. Look at sectors, investment strategies, or fundamental factors to build a more nuanced understanding of the market.
By questioning narratives and looking beyond labels, you can make informed investment decisions, regardless of whether you're dealing with a "meme" or a "story" stock. Remember, the true driver of value is a solid company with strong fundamentals (growing earnings), not just a catchy narrative. Or do you have a different perspective?