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The meme trade is spreading, and morphing into something new. The spread increases the potential gains, and pain, of traders looking to make a fast buck with little or no regard to fundamentals.
Stock in Clover Health rose 32% on Monday and 86% on Tuesday. Shares were up another 20% in premarket trading on Wednesday.
Clover fits the meme stock mold. It’s a small capitalization stock with a huge short interest. About 36% of the shares available for trading have been borrowed and sold short by bearish investors betting on price declines. That’s roughly six times the average short interest for small cap companies.
wendy’s stock also rose Tuesday, by 26%. Wendy’s, however, doesn’t fit the meme mold. Its short interest ratio is below average and the fast-food restaurant company has an established business with a relatively stable stream of earnings. Still, shares hit a new all-time high Tuesday. The trading action can’t be called a short squeeze, with retail traders attempting to punish bearish hedge funds. That is a common theme for many meme trades.
The Wendy’s move is a cause for worry. More stocks getting roped into meme madness means traders have more stocks to push around. And volatility can be poison for investors. Too much volatility eventually results in lower stock valuations. More-volatile stocks are more risky.
The other problem is that meme stocks aren’t worth the prices being paid. They will fall eventually. And with more stocks rising in chunks, that means more pain for the investors left holding the bag.
