Resurgent risk appetite among some investors is fueling rallies in the shares of so-called meme stocks after a crushing year for equities.
Notable moves include a 45 per cent surge since the start of January in the shares of Bed Bath & Beyond. The company’s shares hit a three-decade low at the start of this month when the retailer warned it could seek bankruptcy protection.
The retailer’s shares were up further prior to Friday, when they fell 30 per cent after the New York Times reported the company is in talks with private equity firm Sycamore Partners for the sale of its assets as part of a possible bankruptcy process.
Carvana Co shares, meanwhile, are up 48 per cent this month amid heavy short interest, while shares up Revlon Inc are up nearly 28 per cent. Shares of older meme stocks have joined in the rally, with GameStop Corp up nearly 11 per cent and AMC Entertainment Holdings Inc up nearly 25 per cent.
A 1,600 per cent rise in shares of GameStop in early 2021 first put the spotlight on meme stocks and the retail investors that helped drive many of their rallies as they coordinated in forums such as Reddit’s WallStreetBets. Though many of those initial rallies have since sputtered, meme stocks have seen a number of short-lived rebounds since then, often coinciding with resurging risk appetite in broader markets.
Signs of easing inflation that some investors believe may push the Federal Reserve to end its rate increases sooner than projected appear to be contributing to the latest moves in meme stocks while also helping push up the S&P 500, which is up 4.1 per cent this year. The index fell more than 19 per cent in 2022.
“When we get a little bit of easing in inflation expectations … risk appetite comes back on and retail investors tend to pile into [meme stocks] in hopes of this lottery-like payoff,” said Garrett DeSimone, head of quantitative research at OptionMetrics.
Meanwhile, the Cboe Volatility Index, known as Wall Street’s fear gauge because it reflects demand for downside protection, was recently at 18.1, its lowest level since January 2022.
“The rally in risk assets has carried meme stocks in its wake,” said Jason Benowitz, senior portfolio manager at CI Roosevelt.
Also, “investors who sold for tax reasons in late 2022 might be reinvesting in early 2023,” he said.
Analysts at Vanda Research noted that January and February tend to be among the strongest months for retail inflows.
“Moreover, retail investors tend to rev up their purchases heading into the earnings reporting season, as heightened volatility presents more opportunities for attractive returns,” Vanda’s analysts wrote.
Market participants are quick to warn that similar rallies in meme stocks - as well as broader markets - have crumbled in the last year. GameStop shares are down more than 75 per cent from their peak, while Bed Bath & Beyond shares, which surged to above US$20 last year, quickly reversed those gains. A number of bounces in the S&P 500 last year also crumbled.
Despite the renewed buying from retail investors, “the hurdle to reach previous net-flow highs looks difficult, and any meme stock mania is poised to be short-lived, in our view,” Vanda analysts wrote.
-- Medha Singh, Reuters
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Ask Globe Investor
Question: Is HXT a better alternative to the venerable XIU? It seems to have a lower MER and automatically reinvests dividends (so you don’t see any DRIP activity on your account). Is there a catch? - David K.
Answer: XIU-T is the symbol for iShares S&P/TSX 60 Index ETF. It invests in a portfolio of large cap Canadian stocks and has been around since 1999. Performance has been good, with a 10-year average annual compound rate of return of 8.99 per cent to the end of November. The management expense ratio (MER) is 0.18 per cent.
HXT-T is the trading symbol for the Horizons S&P/TSX 60 Index ETF. That’s the same index as XIU tracks so it should be no surprise that both hold the same securities in roughly the same proportion. HXT has a slightly better 10-year average annual return, at 9.12 per cent, which would appear to be due in large part to its lower MER of 0.04 per cent. Note, however, that the low management fee is due in part to a rebate of 0.04 per cent that could be withdrawn. Even without that, however, HXT will still be cheaper. (Also note that HXT has a total return approach, which means dividends are built into share price gains and not paid in cash. There’s a tax advantage in non-registered accounts.)
This is an example of how a lower fee can give you a slight edge in returns. It’s not a lot but over the years it adds up, especially on large amounts of money.
-- Gordon Pape (Send questions to email@example.com and write Globe Question in the subject line.)
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