What happened
Monday isn't a great day for the broad market, but it's a downright terrible one for some of the market's more popular meme stocks. Shares of Sundial Growers (SNDL +2.90%) and GameStop (GME +1.53%) are down 2.5% and 11.5%, respectively, as of 2:18 p.m. ET today. AMC Entertainment Holdings (AMC +0.00%) is leading the charge lower, however, with its 14.3% setback. Curiously, there are no damning headlines to point to as the cause for the steep sell-offs.
So what
It's a rough day for these three and other meme stocks, to be sure, including Bed Bath & Beyond (BBBY +0.00%) and Clover Health Investments (CLOV +1.05%), with the former off to the tune of nearly 6% while the latter is lower by nearly the same.
But it's not as if today's stumbles were sudden or surprising setbacks. AMC Entertainment is now down nearly 50% from its early November high, reaching multimonth lows as a result this morning. Sundial shares are off almost 40% from their peak reached in early November. GameStop stock is also at multimonth lows today, having fallen more than 50% over the course of the past three weeks. Clover is deep into new-low territory as well, while Bed Bath & Beyond are now down 35% from the peak hit with last month's recovery effort.
Some good news has surfaced from (or about) these outfits in the meantime. For instance, AMC managed to top its third-quarter earnings estimates. Sundial shares briefly surged early last month after the company announced it would be repurchasing up to $100 million Canadian dollars ($78.14 million) worth of its own stock; for perspective, its current market cap is a little less than $1.2 billion. GameStop's stock began to rally out of a funk and into a new uptrend beginning in October, when it seemingly looked like activist investor Ryan Cohen would be able to lead the video gaming retailer out of trouble and back to relevancy.
None of this reporting or its ensuing bullishness, however, has lasted.
That reason? It's not because of the spread of the omicron variant of COVID-19. Rather, so many of these once-popular meme stocks are now stumbling largely because their fiscal realities are no longer being obscured and overwhelmed by the prospect of short squeezes. With the one exception of Sundial, short interest in these stocks has been measurably falling since October, if not before.
Image source: Getty Images.
Now think more philosophically about what that shrinking short interest says. It's also a clue that traders believe the bullish arguments needed to get short squeezes started are no longer effective.
That's not misguided doubt, either. AMC's theater attendance is stabilizing, for example, but only at about half of its pre-COVID-19 levels. Even as legitimate fears that Sundial may never be profitable circulate, the company is also in acquisition mode, further crimping prospects of it being acquired itself. Without any clear turnaround plan in place to reverse years of shrinking revenue, the analyst community still says GameStop shares are worth only a little less than $85 apiece. That's about 40% below the stock's current price.
Connect the dots. The meme stock trade just isn't working any longer -- particularly ones that were prompted by organized plans to spark short squeezes.
Now what
None of this is truly surprising to veteran investors, of course. The market can only ignore fiscal results for so long. And the unsuspecting short-sellers that were briefly caught off guard earlier this year aren't going to make the same mistake again anytime soon. Both were and are necessary components to force a rally from stocks of companies that aren't exactly well-grounded winners.
Don't look for this waning of enthusiasm or shrinking short interest to reverse course anytime soon, either. It took weeks for the hype-driven meme stock movement to gel. It could take several more weeks for it to dissolve now, even though it's already been quietly doing so for a while. Today's selling is just the firmest evidence we've seen of this weakening.
That's not to say these stocks can't or won't climb again at some point in the future, to be clear. It's just to say that no newcomer can afford to take on such speculative positions right now if they're not fully prepared to suffer more sizable losses.
