How the meme stock frenzy is changing the way Wall Street thinks

Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman react to the meme stock trading frenzy.

Video transcript

[MUSIC PLAYING]

MYLES UDLAND: This was a $4 stock, folks, six months ago. So this thing has come quite a long way.

JULIE HYMAN: There's a 2 year chart of AMC. I mean, look at that thing. This was a cryptocurrency that was created as a joke, based on that doge, the cute shiba inu meme.

MYLES UDLAND: Reddit is saying, hey, just because you guys have CFAs, and wear vests, and go to an office in midtown doesn't mean that you're the only ones who can understand what's happening.

BRIAN SOZZI: I'm the voice of reason. The fundamentals are just-- in no way on some of these companies justify these valuations. It may not be tomorrow. But rest assured, it will absolutely end very badly for the traders trading these stocks.

JULIE HYMAN: Getting reports this morning from people who use Robinhood, in particular, that basically it's not allowing people to put on new positions.

- A relatively small number of stocks have gone viral. And we have to have a prudent risk management. And that's what the firm did.

JARED BLIKRE: And even though this is a financial services committee, there are very few people on that panel who are going to truly understand what's going on.

KEITH GILL: I'm not a cat. I'm just an individual who's investment in GameStop and posts on social media were based upon my own research.

MYLES UDLAND: I mean, Sozzi, are we ever going to be at a point in our lives when we don't check in on GME every so often?

BRIAN SOZZI: No, it's a trade that we just can't-- we can't shake.

[MUSIC PLAYING]

MYLES UDLAND: And five months later, we are still talking about GME, AMC, and all of the names, of course, that have been a part of the meme trade over the last several months. But you know, I was watching that montage last night when our producer sent it over. And I was really struck by those comments, hearing Keith Gill, Roaring Kitty, also known as Deep Effing Value on Wall Street Bets talk about his thesis.

And, you know, there was a time back in January I spent hours watching his YouTube videos, breaking down the fundamental case for GameStop. And I think what's so interesting, guys, as we sit here and take stock of what is a meme stock? How do we get there? How do we define it? What role do they play in the market? You know, Julie, this began as a very simple hobbyist investor who knew what he was talking about, looking at a single name, and saying, I think this is undervalued.

And I think almost everybody who gets involved with this says, at the end of the day, I do care about fundamentals. And we can debate the stock price, but the underlying business is something that a lot of people who were at the beginning of this trend are still keeping in touch with.

JULIE HYMAN: And, you know, there are a lot of Keith Gills out there. That's something that's been sort of fascinating to me too. There are a lot of these amateur investors who have YouTube channels, who have followings of varying sizes, right, who try to make these kinds of recommendations in these kinds of cases. And just like it's a little bit of a mystery why certain things go viral and other things don't, it's a little bit of a mystery why GameStop is the one, right, that initially caught fire here, and then spiraled out of control, one could argue, and then inflamed the meme stock trade generally.

And one of the conversations we've started to have here is, how does this happen, right? What defines a meme stock? How does something get to be a meme? How does it catch the attention?

We know Wall Street Bets was the sort of breeding ground, if you will, and continues to be the breeding ground for these meme stock ideas. But Myles, you sort of came up with some criteria, sort of casual criteria or commonalities, if you will, between some of these meme stocks that, you know, it's not sort of hard and fast rules. But it does seem like they do share some things.

MYLES UDLAND: Yeah, there were a couple ideas. And let's bring up the full screen that I think we made here that has sort of the four criteria that are, in general, like the things that tend to go into a meme name.

And Soz, I'd love to get your thoughts on these. I think the first one is actually the most interesting to me. Because we all know that the value of a business doesn't require that it's per share price trade at any price, right? Amazon's At $3,000 and GE's at $14 or whatever it is. And between there there are all kinds of different stock prices.

I mean, let's take a better example. Apple's at $130 or something. Amazon is at $3,000 per share. But the value of both businesses is about the same.

But it does seem that meme stocks tend to begin with stocks that have a low per share price. Also tend to be smaller companies, market caps usually under about $10 billion, oftentimes even smaller than that.

But you know, as we were kind of screening this out, under 2 it's mostly small, little biotechs. Under 10, you have names like Nikola fit in there. Clover fits in there, Root Insurance, Smile Direct, some of these names that are, again, heavily shorted, but have gotten pretty interesting to retail investors as time has gone on.

Short float. We're going to get to that with Ihor Dusaniwsky of S3 in just a bit. Usually 15% or more. We've seen what those numbers can be with GameStop.

And then, Sozzi, something I know that you continue to be interested with, especially in the AMC, GameStop trade, these are names people know. People know AMC theaters. People have been to GameStop retail locations. And that is absolutely-- and Wendy's earlier this week. That's absolutely a part of how these names get memeified on Wall Street Bets. Because people know the brand.

BRIAN SOZZI: Oh, right on, Myles. And I'll add even a bonus one to that list. I would say FOMO. FOMO is another good qualification for a meme stock. What does that mean? Fear Of Missing Out.

And it's these companies where like a GameStop, and you have really hardcore believers still in the name, even after the stock sell off post earnings there this week. You have that hardcore group of entrenched traders that believe in a Ryan Cowen. They believe in a new vision of GameStop.

Whatever they might be, they may have it cooked up on their whiteboard at home while they're trading. Whatever it is, they believe in it. And they are able to articulate their views or that belief to a whole trading-- a whole new trading community online, that may not be spending many hours reading financial statements, but they're on the trading channels, debating about the future of the company. And they're able to get one another believing in the outlook for said company.

But I'll also note this too, guys. You know, as a former analyst, I have just been amazed to see some of these moves, and how the stocks have completely disconnected from fundamentals. And I think it's caused a lot of Wall Street analysts to go back and rethink how they are calculating fair value for stocks.

And in some cases, if they can't come to terms with this new type of trading environment, this new type of analysis, they have just dropped coverage on a GameStop. They've dropped coverage on an AMC.

I know we'll talk to an analyst later who covers AMC. His price target on it is $6. So very interesting to see-- or I'm looking forward to talking to him about why he has that price target and how he's thinking about analysis moving forward.

MYLES UDLAND: Yeah, $62 there is Chad [? Binan's ?] price target on AMC, analyst over at [? Macquarian. ?] And I know we mentioned it on the program yesterday, but we got a lot of no's from analysts who just don't want to play ball with this stuff, Soz.

You know, this doesn't fit into how you build an analyst model, a sell side model to give to your clients. And they want nothing to do with talking about these names, especially not with the media on a public facing forum like this.

But if we talk about the meme names-- and I think part of the reason that the trade endures is because people have made a lot of money on a lot of these names.