A whiff of positive news – a good line in an earnings report, a hint of a merger, a rumor potentially started by a trader looking to unload a position at a profit – can bring any meme stock back to the fore.
With the second busiest week of earnings season now over, that kind of action was visible this week, prompting one researcher to issue a fresh warning about an old meme stock that recently caught fire again.
Retail investor meme stock crazes have sent many stocks surging since Covid, including GameStop, AMC Entertainment, and Peloton.Image source: Ethan Miller/Getty/Shutterstock
While meme stocks create new stories and legends with each passing cycle, the truth about many of these companies is that they are working their way towards nothing—the abyss that awaits when social sentiment finally wanes and the balance sheet is all that is left.
Think Bed, Bath & Beyond, which was trading at less than $4 per share in 2020 when it got caught up in the meme mania ignited by video-game retailer GameStop (GME) .
Share prices surged past $50 per share before the public’s attention turned and the company began an inexorable death spiral, buried under a mountain of debt and other problems.
Bed Bath & Beyond filed for protection from creditors under Chapter 11 of the U.S. bankruptcy code in April of 2023 and subsequently closed its 360 stores.
But it’s hardly alone.
AMC Entertainment (AMC) was an OG meme stock with GameStop. Three years ago, it was trading at over $130 per share, but now it trades at less than three bucks a share, roughly 50 percent off its 52-week high. GameStop, meanwhile, trades roughly where it was a year ago but is off by over 30 percent from its most recent peak in mid-May.
While yesterday’s meme stocks are likely to rekindle some interest periodically, they have been replaced by names like Opendoor, Krispy Kreme, GoPro, and Kohl’s, all of which have ridden the tsunami that can happen when social media and active traders mix.
David Trainer, founder and president at New Constructs, a Nashville-based independent investment research firm, has said for years that meme stocks are all about a trader’s willingness to focus on hype and hope and ignore numbers.
He believes the numbers win out in the end, but he acknowledges that plenty of stocks overcome bad news to be back in the market’s good graces even while they are on a fiscal path to oblivion.
Peloton Interactive (PTON) —which has been in the realm of meme stocks since it became a darling of the pandemic—got just that kind of boost on August 7, when it reported a profit for its fiscal fourth quarter, boosting shares by about 10% while the market ignored a warning that sales of exercise machines and digital subscriptions are set to decline, requiring some layoffs and a relocation of operations to cut costs.
The fitness-equipment maker registered a $21.6 million profit (5 cents a share), compared to a loss of $31.9 million a year earlier. According to a FactSet survey, analysts on average were expecting a loss of 7 cents a share, slightly better than a year ago.
But before the positive earnings surprise, Trainer was already calling for Peloton to suffer the ultimate meme stock fate, featuring the stock on the August 4 edition of “The Danger Zone” on the Money Life with Chuck Jaffe podcast.
New Constructs brings together discounted cash-flow analysis and forensic accounting to evaluate securities on a scale of “most attractive” to “most dangerous.”
The firm’s stock-picking has been rated by SumZero at or near the top of multiple investment categories, most notably leading consistently in consumer discretionary stocks; SumZero is a buy-side community in which more than 15,000 professional portfolio managers compete for rankings.
Peloton shares have lost 72% of their value since the IPO in 2019, but are up more than 100% in the last year.Cheng Xin/Getty Images
New Constructs first featured Peloton in the Danger Zone prior to its IPO in September 2019; since then, the firm reports that its shares have fallen 72% while the Standard & Poor’s 500 is up roughly 115%.
But what put Peloton back in the Danger Zone recently is that meme-stock investors are tuning out the company’s long-term results and looking at its recent performance. Shares are up more than 100% from last August, largely due to shrinking losses.
New Constructs reported that, “this turnaround story is already baked into the stock valuation, and at current prices, downside risk remains large,” driven by declining sales, high cash burn, the sale of assets, shareholder dilution, and “a stock valuation that implies drastic margin improvement and rapid revenue growth.”
Trainer, in his Danger Zone appearance on the August 4 edition of Money Life, said Peloton is “making a little meme stock run here … and we just want to remind people that it’s still a bad stock.”
“Peloton still has negative margins, negative economic book value, and it’s trading as if its profits are going to dramatically increase and its revenues are going to grow 800%,” Trainer said. “So like whatever turnaround you think there might be here, you know, we think it’s all priced in.”
Trainer said Peloton’s “business model is not a good business model,” noting that the bounce-back is a misdirect or a head fake and that Peloton is “just left with something that’s going to probably die pretty slowly.”
He acknowledged that the stock could still have another meme stock run, possibly a dead-cat bounce and can survive for a while until he thinks the inevitable happens.
He pegged the economic book value on PTON at a negative $6.60 per share, adding that it’s first-mover advantage in the home exercise space is gone, and that he would value the company “conservatively” at less than a dollar per share. Said Trainer: “This one could really go bankrupt.”
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