BB&B: meme stocks are linked to fundamentals — someone else’s

Are meme stocks still a thing? Very much so, if the 400 per cent surge in the share price of US home goods retailer Bed Bath & Beyond over the past month is anything to go by.

Conventional wisdom dismisses these equities as detached from fundamentals. A more accurate view is that they are detached from their own fundamentals — but not from those of the market as a whole.

Reddit’s WallStreetBets crowd laid low during the worst of this year’s market rout. A sustained rally on Wall Street since June — fuelled by a stronger-than-expected corporate earnings season — has lured them back.

Meme stocks, like bitcoin, are therefore useful gauges of animal spirits that depend for their vigour on evidence of decent, old-fashioned earnings somewhere else in the financial system.

Bed Bath & Beyond was the third most bought stock by retail investors on Tuesday, according to Vanda Research. Overall trading volume hit nearly 400mn, compared to an average of less than 12mn. The stock was only behind Tesla for bullish call options traded among retail investors.

GameStop, the video game retailer that became the original meme stock last year, has almost doubled in value since May. Movie theatre operator AMC, another Reddit favourite, has gained 40 per cent over the past month.

This week’s buying frenzy in Bed Bath & Beyond appeared to have been triggered by news that the vehicle of investment influencer Ryan Cohen had bought call options betting the stock can rise as high as $80 a share.

None of that justifies the stock’s lofty valuation of 70 times forward earnings. Not given the retailer’s shrinking cash position and ongoing struggle to revive sales growth.

Second-quarter profits among S&P 500 companies are expected to have climbed 10 per cent from a year earlier, according to Refinitiv data. This momentum is unlikely to last given high inflation and shifting consumer spending habits.

The reappearance of meme stock traders should hint to the Fed that inflationary pressures are still ballooning — which means expected rate rises may be too low.