Here Are My 2 Favorite Meme Stocks -- And Why I Still Won't Buy Them

The "meme stock" frenzy has created some interesting volatility in certain stocks. Some meme stocks aren't great businesses, but there are a few exceptions. In this Fool Live video clip, recorded on July 2, Fool.com contributor Matt Frankel, CFP, discusses his two favorite meme stocks, Bed Bath and Beyond (BBBY) and Clover Health Investments (CLOV 1.82%) with chief growth officer Anand Chokkavelu, as well as why we aren't likely to see either in his portfolio anytime soon. 

Matt Frankel: Out of all the meme stocks, I could see why this [Bed, Bath, and Beyond] was No. 1. They have a very real business, they are a profitable company, they grew sales 49% year over year in the first quarter, which, take that with a grain of salt, because the first quarter of last year, one month of it was the COVID lockdowns. Take that with a grain of salt. Their core brands are really growing fast. When Toys R Us went out of business, now Buy Buy Baby is really the only baby superstore in most markets. They dominate that market. Anand and I can both tell you first hand when you need a product for a baby, you don't want to wait for Amazon to deliver it, you need to go get it. That's a big competitive advantage in my view, a lot of essential retail, but I don't want to own a meme stock, I just don't. I said this in the episode, and the wild price swings, I don't want to have to deal with. I could deal with price swings in my portfolio. I get that that's part of investing. Bed Bath & Beyond is up 195% over the past year. At one point, it was close to 400%. It's up 77% year to date. The wild price swings are making me overlook the good parts of the business. While the valuation makes sense right now, they are expecting about a $1.50 in adjusted earnings this year, which gives them a price-to-earnings ratio that's about 20. It's not insane, but how long is that sustainable? Like I said, the Buy Buy Baby aspect of it is going to be around that's got staying power, their core Bed Bath & Beyond business. I'm not sure how you prevent that from being a slowly declining business over the years.

Anand Chokkavelu: Yeah. It speaks to me like what they're doing make sense. It's like classic turnaround playbook, but I was hyped up on Michaels (MIK) last year. Part of it was, I thought it had a good chance. One, the valuation was just crazy low, but the other was, I think it's going to be around for years to come. You have those crafts and things like that makes sense in a retail setting. Bed Bath & Beyond it's, I remember we registered with them for our wedding. Even then, it was probably like, really? You're doing Bed Bath & Beyond? But it was actually pretty nice. But you do wonder, these classic value plays, everything with they're buying back shares, it seems reasonably priced and all that, I have been bitten so many times, I know this is a weakness, so the bar is really high. Even though it's our worst-ranked stock, for true value investors, it's something to look at.

Frankel: Yes. If you're retail turnaround believer, I prefer to play in the retail space from the real estate point of view, just being the real estate guy here at The Motley Fool. But that's just my opinion. I think it's a well run company. I can see why it was No. 1. I think our No. 10 stock out of these 11 is our other number one meme stock. It just so happened our meme stocks were the last two, go figure. Coming in at No. 10 is Clover Health. I ranked this one a little bit higher than you did. If I looked at the stock's price action over the past week, I probably would've rank it even higher. It's deflating, it's starting to not behave like a meme stock anymore. It's starting to come back to its pre-meme valuation, if that's a thing.

I owned Clover Health until that whole crazy stock rally happened. I sold my position somewhere between $17 and $18. It started to go parabolic and I just wanted no part in it and I said, you Reddit traders, have fun. But at the end of the day, there's a pretty big opportunity. The economics of the business don't look great right now, which is I think everybody's biggest hang-up on the company. Their coverage ratio, I forget the exact term in the Medicare industry, but in insurance, you call it the loss ratio, is 107.6%. That means that for every $100 they're taking in in premiums, they're paying out $107.60. That's not sustainable, something has got to change. They got to figure out a way to address that problem. They say they can do the same service for 17% cheaper to the customer than competitors. They offer faster payouts to practitioners, better payouts, they claim. There's a lot of opportunity here. They're competing against some big players in the space, who have deep pockets to innovate and to drive costs lower and who can absorb losses for longer than Clover Health can. No. 1 is UnitedHealthcare (UNH -1.05%), which is 27% of the Medicare Advantage market. No. 2 is Humana (HUM 0.64%), which has 18% of the Medicare Advantage markets. Those are the two big players. UnitedHealthcare has over 7 million Medicare Advantage customers alone. Clover Health is about 130,000. Not even in the same ball park size-wise. Big opportunity here, there are about 27 million potential customers that have Medicare Advantage plans. We're talking about expanding into actual original Medicare plans, which opens up a whole another addressable market opportunity. But they really have to figure out how to get the economics right before it's an I'll-own-it-if-it's-cheap stock for me.

Chokkavelu: I do own it. It's one of those where I really need for my own personal comfort level. I'm still struggling with how the competitive dynamics of what they're promising, you talked about that 17%, better and allowing physicians onto its platform and helping them make better decisions and how that all actually works in practice. I would love a 50-doctor panel to just go through, OK, you use it. What's great about it? What's bad about it? I've seen the YouTube video of how it works and stuff, but usually the devil's in the details, where a doctor could tell me quickly, "Well, but here's the catch," or, "Well, what people are underestimating is this one thing that will hook people in."

Frankel: One real thing investors need to understand is that a great product doesn't always make a great business. I think that's where Clover Health is at right now, it may become a great business, it's not today.