Shares of home-goods retailer Bed Bath & Beyond Inc. tumbled to less than $5 last week, marking a 90% slide from the peak in early 2021, as the company ousted its chief executive officer following a failed turnaround effort. To the uninformed, this may seem like just another troubled retailer unable to cope with rapidly changing consumer tastes. The reality is that the plunge represents so much more, perhaps bringing a welcome end to one of the wildest periods in the history of Wall Street.
Bed Bath & Beyond was one of a handful of companies along with GameStop Corp. and AMC Entertainment Holdings Inc. that inexplicably captured the fancy of legions of novice traders sitting at home and bored during the pandemic in late 2020 and early 2021 in what became know as the meme stock frenzy. It didn’t matter that a troubled business model caused Bed Bath & Beyond’s revenue and earnings to suffer in the second half of the last decade, leading it’s shares to drop from around $80 in 2014 to less than $4 at the start of the pandemic. For those plying the Reddit message boards and exchanging uninformed opinions and analysis, Wall Street had it all wrong. These companies were diamonds in the rough, with their true potential overlooked. Bed Bath & Beyond shares shot up five-fold over the course of a few months to as high as $53.90 in January 2021.
But Wall Street wasn’t wrong. In what has become one of the worst years on record for the stock market, with the S&P 500 Index down 20%, the Solactive Roundhill Meme Index is down much more, tumbling in excess of 50%.
As the pros suspected would happen, fundamentals did eventually take over and the meme stocks have mostly returned to something akin to fair value. The only thing that the Redditors proved was that an army of novices acting in concert can exploit short-term liquidity constraints to push prices around, but in the long run the stock market does an efficient job of separating winners and losers. Some people have framed the era as a war between Main Street and Wall Street, but the only way retail investors can win that war is by conservatively investing for the long term.
And yet, it seems they’re still trying. The self-described “apes” are currently attacking AQR Capital Management founder Cliff Asness for saying he was shorting the shares of movie theater chain AMC. It didn’t matter that Asness went on to say that he’s long and short thousands of stocks and any one position was insignificant, all it took was the mere mention that AMC was one of the many stocks he expected to decline. The AMC believers are indistinguishable from a cult in that they only seem to become more strident in their bullish stance the lower AMC’s share price goes.
My advice to the apes would be to pick almost another stock. Take away the pandemic, and the business prospects for AMC and movie theaters are poor. Sure, there will be occasional hits such as Top Gun: Maverick, but attendance has been declining for a long time. If the apes had instead picked an energy stock, they’d probably be a lot happier.
Frenzies come and go on Wall Street. There was the Nifty Fifty in the 1960s, the speculative craze surrounding a flood of buyouts in the 1980s, the dot-com bubble at the end of the last century and the homebuilders in the 2000s, but none of them - with the possible exception of the dot-com era - ever approached anything like a cult.
The reality is that although the meme stock frenzy created a host of risks for professional investors, it also presented opportunities. Yes, the sudden and tremendous rise in GameStop shares due to overwhelming demand by the Redditors led to the implosion of Melvin Capital Management, but the hedge fund was simply short too much GameStop shares for its own good. Not having all your eggs in one basket is a lesson even the pros should remember.
The opportunity came in the derivatives market, where retail investors were buying so many call options tied to the meme stocks that it induced a “gamma squeeze,” a term that didn’t exist before the meme stocks. The volatility surface—the relationships of options prices across strike prices and maturities—was contorted in ways never seen before. Market makers were able to recognize and profit from the dislocations, facilitating an enormous transfer of wealth from the unsophisticated to the sophisticated.
One could make the argument that without social media, the meme stock frenzy would never have happened. Investors can’t pile into one stock and push the price around in a coordinated fashion without the means to communicate with each other. Could we get another meme stock frenzy in the future? It is entirely possible, even probable. But not in the current environment. It’s only at the top of a bull market when such things are possible.
Meme stock mania is clearly over at this point, and yet the Redditors are still clinging to hope. I wouldn’t feel too bad for them. There is no shortage of information available about how to invest responsibly for the long-term, such as to buy and hold index funds, and dollar-cost average along the way. Nevertheless, the lure of easy riches in the stock market can be too great to resist, but the reality is that it’s never easy and never lasts. Too often, the stock market turns out to be one giant bug zapper and the novice investors are the mosquitoes.
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