Beware of Meme Stocks

Recent news has paid a lot of attention to “meme stocks” – such as GameStop and AMC Entertainment Holdings – that have skyrocketed because they were hyped on social media. Cryptocurrency Dogecoin, named for a shiba inu dog and begun as a joke, also joined the meme party, racking up gains of as much as 12,000% from early January through early May.

The meme stock boom could signal a fundamental change in how the stock market works, but it could also be a massive bubble soon to burst. While some investors have profited from the popular names, there are multiple reasons to avoid meme stocks. For example:

1. You’ll never know when to sell. Deciding when to sell an ordinary stock is hard enough. But with meme stocks, the fundamental factors that apply to most other stocks don’t apply, and sudden parabolic gains can easily disappear.

2. You could lose a lot of money. In January, GameStop suddenly surged to $483 a share before plunging more than 90% over the subsequent weeks.

3. They are simply overpriced. A stock isn’t just a bet, it’s ownership in a business, and the price of that stock generally represents the performance of that business over time. Meme stock prices are often divorced from the fundamental value of the company.

Buyer beware.

Ask the Fool

Q: I was thinking of investing in Lordstown Motors, which is making electric trucks, but the stock has been really volatile. What’s up?– F.H., Vineland, New Jersey

A: Lordstown Motors has been a bit of a cautionary tale lately. Many investors had been excited about the prospect of electric trucks, which lifted the stock price. But a few months ago, allegations were made that Lordstown was overstating its orders, and the company warned that it might run out of cash next year.

Then the CEO and CFO both resigned after an investigation suggested that at least some allegations were true. Research it deeply before investing, or wait for it to get on firmer ground.

Q: Do companies ever reduce their dividends? – G.P., Erie, Pennsylvania

A: Yup. When companies are struggling, they may reduce, suspend or even eliminate their dividend in order to conserve cash. However, most companies try to avoid dividend cuts if possible, as they can look like signs of financial weakness and disappoint shareholders.

AT&T is a recent dividend-cutter, announcing in May that along with spinning off WarnerMedia and merging it with Discovery, it will be “resizing” its dividend to a smaller one. After having increased its payout for 36 years, it will end that streak and be ejected from the list of “Dividend Aristocrats” that have hiked their payouts for at least 25 years in a row.

Many companies have sharply reduced their payouts; some raised them again later, though at lower levels. Harley-Davidson has drastically cut its dividend then raised it somewhat twice since 2008.

General Electric, meanwhile, cut its payout four times over that period; since 2019, it’s been only a penny a share.

My Smartest Investment

My smartest investment has been education, hands down. Without it, I wouldn’t have a career, house or retirement savings. – P.L., online

The Fool responds: Education is generally a terrific investment, and it can enhance your life in countless ways.

As you note, it can qualify you for a satisfying career, which can help you save money for a home and sock away needed dollars for retirement.

Adding degrees or professional certifications over time may help you climb the ladder and earn more, too.

But there’s even more to it than that. Education takes many forms, including simply reading. Reading often and broadly can make you a more interesting person to talk to and can help you be a better writer, for both social and business purposes.

Reading deeply about investing can help you get better at it, so that you can grow your investments more briskly and retire with a fatter nest egg. (Indeed, those who start learning early about investing and act on what they learn may be able to retire earlier and more comfortably.)

Educating yourself about health matters can help you get and stay healthier, so that you spend less on health care throughout your life.

And some studies have suggested that certain kinds of education, such as learning a second language, can benefit the brain – not to mention making traveling more fun.