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Why Meme Stocks Led the Stock Market Higher on Wednesday

By Dan Caplinger - May 26, 2021 at 12:12PM

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GameStop and AMC are back in the news.

The stock market got off to a solid start on Wednesday, with most major market benchmarks moving higher. Despite some of the price increases that the economy has seen in recent months, investors appear to be getting more comfortable with the idea that inflationary pressures are more of a temporary phenomenon. As of 10:45 a.m. EDT, the Dow Jones Industrial Average (^DJI 1.27%) was up 46 points to 34,358. The S&P 500 (^GSPC 1.73%) had picked up 6 points to 4,195, and the Nasdaq Composite (^IXIC 2.09%) had risen 61 points to 13,718.

Yet when you look at some of the best performers in the market on Wednesday morning, you might notice a couple of crowd favorites. Both GameStop (GME 3.27%) and AMC Entertainment Holdings (AMC -4.01%) are moving sharply higher, and these popular meme stocks remain in the collective consciousness of ordinary investors as their businesses try to take advantage of their high stock prices while overcoming the challenges they face.

GameStop keeps playing to win

Shares of GameStop rose 15% on Wednesday morning, adding to big gains in recent days. The video game retailer is going through a massive transformation effort, but it's unclear how many traders are focusing on the short-term prospects to take advantage of institutional investors trying to sell the stock short.

GameStop has taken several favorable steps to take advantage of its elevated stock price. It completed a secondary offering of stock in April, raising cash that it used in part to redeem $216 million in debt on which it was paying a 10% interest rate. Moreover, GameStop invested some of its capital in the lease of a massive 700,000 square foot fulfillment facility in Pennsylvania, with the goal of helping to support its pivot toward e-commerce by bulking up its East Coast presence.

A continued high stock price could possibly open even more doors. Having eliminated its debt, GameStop could raise capital to finance expansion efforts further, or even make smart strategic acquisitions. For instance, with some video game developers seeking to eliminate intermediaries like GameStop in favor of direct distribution, one avenue GameStop might pursue would be to build strategic alliances or even seek out acquisitions of prominent game development companies.

At this point, investors are excited to see the stock reach its best levels since March. The big question is whether GameStop will be able to hold onto its gains this time around.

Several rows of movie-watchers sitting in their seats.

Image source: Getty Images.

The show goes on for AMC

Meanwhile, AMC Entertainment Holdings picked up another 13%. The movie theater operator's stock is getting close to its January high of around $20 per share, and it too has a pathway to prosperity if things line up well for the company.

Many investors are excited about the prospects for AMC to start seeing more people return to its theaters. As more people in the U.S. get vaccinated, restrictions on gatherings in theaters are disappearing. That might set off an avalanche of interest among those who've been stuck at home to get a premium movie experience, and AMC is ready to cash in on that demand.

To be clear, AMC faces plenty of hurdles. The long-term trend has been against movie theaters and toward home entertainment, and there's no guarantee a post-pandemic surge will be long-lasting. AMC also faces potentially higher costs from its landlords even as wrestles with higher debt levels. Unlike GameStop, AMC hasn't been as aggressive in raising cash from secondary stock offerings to strengthen its balance sheet, and that could hurt the movie theater operator if it can't get its debt under control.

Meme stocks like AMC and GameStop have seen huge advances before, and investors are hoping that the pair will avoid the steep declines they've seen following past rallies. In the end, how the two companies' businesses perform will determine whether shareholders have a chance to build on the massive gains they've earned recently.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$40.74 (3.27%) $1.29
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,761.05 (1.27%) $424.38
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,280.15 (1.73%) $72.88
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
$13,047.19 (2.09%) $267.27
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$24.44 (-4.01%) $-1.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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