Did investors learn nothing from last year’s market meltdown?
Meme stock mania was supposed to be over, right? Guess what: It’s not.
Sure, the entire market did well in January. But many of the Reddit/WallStreetBets darlings of two years ago were particularly strong performers.
Shares of movie theater chain AMC have soared nearly 65% so far in 2023, and AMC’s companion preferred stock (which trades under the ticker APE as a nod to the nickname AMC fans have given themselves on social media) has more than doubled.
Meanwhile Bed Bath & Beyond has gained about 30%, despite rumors of an imminent bankruptcy filing and more store closings. And shares of GameStop, sort of the OG meme stock from 2021, are up more than 25% as well.
Speculative investors are going all-in on crypto too. With bitcoin rebounding from a 52-week low of about $15,600 to a current level of just under $24,000, Coinbase shares have skyrocketed an astonishing 140% since the end of 2022.
Then there’s Cathie Wood’s ARK Innovation exchange-traded fund, a poster child for speculative bets that owns Tesla, Zoom, Roku and Coinbase among its top holdings. This ETF has had an incredible start to 2023, surging more than 40%.
Market history repeating itself?
So did investors learn nothing from last year’s market meltdown? I wrote last week about how one strategist dubbed this year’s market madness as a “flight to crap.”
Others are a little less critical of the so-called junk stock rally, but they are still worried this won’t end well.
“I’m concerned generally. I don’t agree with this market rally in meme stocks,” said Erik Ristuben, chief investment strategist with Russell Investments.
Ristuben said he still thinks odds are greater than 50-50 that the economy is heading toward recession. If that happens, lower-quality stocks should get hit hard.
Another strategist agrees this recent rally for meme stocks and other speculative bets may not end well.
“At the start of every year you typically see a mean reversion. The stocks that went down a lot at the end of the previous year get bought,” said Michael Sheldon, chief investment officer with RDM Financial Group at Hightower. “But this year’s sharp rally and rebound in beaten down names has been an extreme example of that.”
The trouble with meme stocks and other speculative companies is that they are often struggling to sustainably make money. They are story-driven companies rather than businesses that have solid earnings and cash flows.
GameStop, for example, posted a net loss of $95 million in the third quarter of 2022. AMC reported a loss of about $227 million.
“Investors should not ignore the fact that owning an unprofitable company and hoping it eventually makes money is expensive,” said Ronald Temple, chief market strategist with Lazard. “The markets are excessively exuberant.”
Temple worries that investors are once again getting swept up by momentum and aren’t stopping to think about how much risk they are taking on with meme stocks.
“There is a little bit of a fear of missing out,” Temple said. “That partly explains the lower quality aspect of this rally.”
Of course, many companies are actually profitable. And investors will be preparing for another torrent of corporate earnings reports this week.
Big banks, oil giants and tech titans have led the earnings parade so far. But now, consumer companies get ready for their closeup.
Among the many retail, restaurant and entertainment companies on tap to report their latest results: CVS, Yum Brands (owner of KFC, Pizza Hut and Taco Bell), Chipotle, Disney, Tapestry (parent of Coach and Kate Spade), Mattel and Pepsi.
Recession worries and inflation jitters hurt consumer stocks in 2022. But some Wall Street experts think these companies are due for a major comeback this year as pricing pressures fade.
“Inflation is slowing sharply,” said strategists at Evercore ISI in a recent report. They upgraded their outlook on consumer discretionary stocks, saying the sector “has once again taken up its traditional ‘worst to first’ role.”
“Consumer Discretionary has a proven track record of outperformance even if growth is subpar in 2023; the key is that while the inflation remains high, the trend of inflation is demonstrably falling,” the Evercore ISI strategists said.
So investors will be listening closely to what executives at big consumer oriented firms have to say in earnings conference calls with analysts about the outlook for 2023. If they’re upbeat about spending, that could keep the rally in consumer stocks going.
The Consumer Discretionary Select Sector SPDR ETF has soared almost 20% so far this year.
Monday: Germany factory orders; earnings from Tyson Foods, Energizer, Take-Two Interactive, Spirit Airlines and Pinterest
Tuesday: US State of the Union address; China trade data; US trade balance; US consumer credit; Australia’s interest rate decision; earnings from BP, Centene, Carrier, Aramark, DuPont, Royal Caribbean, Hertz, Prudential, VF Corp., Yum China and Chipotle
Wednesday: Weekly crude oil inventories; earnings from CVS, Uber, Total, Eaton, Fox, Yum Brands, Capri Holdings, Coty, New York Times, Disney, Goodyear, O’Reilly Automotive, MGM Resorts, Mattel, Affirm and Robinhood
Thursday: US weekly jobless claims; earnings from Pepsi, AbbVie, Nissan, Unilever, Philip Morris International, Duke Energy, Kellogg, Hilton, Tapestry, Ralph Lauren, Thomson Reuters, Warner Music Group, Canopy Growth, PayPal, Expedia, News Corp. and Lyft
Friday: US U. of Michigan consumer sentiment; UK GDP; China inflation; Japan PPI; earnings from Honda, Magna and Newell Brands
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