How Can You Tell If a Stock Is a Meme Stock?

What makes a meme stock a meme stock? And what makes a growth stock that's trading on sale any different from a meme stock? In this segment of Backstage Pass recorded on Jan. 28, Fool contributors Rachel Warren and Jason Hall discuss. 

Rachel Warren: I like it. I agree with Jon and I feel your pain with Zoom specifically as an investor. But I thought I really liked the examples that you provided because I think it is classic example of, we say don't just focus on share price alone. You look at what's happening with the business.

You might have one company in the case of Peloton, where the underlying investment thesis perhaps has changed from what it was for many investors a year-ago versus a company like Zoom, which I am actually a shareholder of.

My investing thesis on that company and the way that business is growing, none of that is sending me red signals of oh, run for the hills by any means, issues, the share price hasn't caught up with it. I think that's a variety of factors.

What we've been seeing with tech stocks lately growth stocks have come down a lot. Then I just think overall sentiment in the market, I think a lot of people aren't sure where to price these companies. For me, it's been the same thing with Teladoc, which I mentioned earlier. The business is still looking great. Yes, the company has a lot of debt on it's balance sheet. That's from those two key acquisitions they made in 2020.

But I firmly believe those will continue to reap dividends for it's business in the years ahead. But again, the stock, I actually got notified it was up like 5% today, which although the stock is still down about 70% over the last year.

Jason Hall: Is this a part I'm supposed to shame you again about having your stock notifications still turned on?

Rachel Warren: I don't check. They just come to me and then I delete them. [laughs] But sometimes I have to look, I purposely don't check my portfolio, but I do get maybe I should.

Jason Hall: In fairness Rachel, we use that for work too.

Rachel Warren: Yeah. To be fair, I use it for work, but that's primarily why. But how do you differentiate? I think that the big difference between these highfliers, like Zoom, like Teladoc from earlier in the pandemic and meme stocks, it comes down to the business.

When you have companies that were famously memed like GameStop and AMC, you had these massively overinflated valuations that were driven purely by retail investor hype, nothing else. It had absolutely zero to do with the quality of the underlying business.

But then you have a company like Zoom for example, the business is doing great, shares are tumbling, but the business is great, and share price in and of itself it doesn't tell you whether or not a business is solid.

One thing that's made me think of as a separate topic in the investing world I've been reading of recently. I think a lot of this goes back to some times this faction of investors that are chasing for the newest, brightest shiny thing.

One thing I've been reading about recently that struck me with this and reminded me of the meme-stock craze and if there has been a bit of a come down from that in recent months, has been some of the craze around some of these more volatile, lesser known crypto assets.

I found this article today and it was actually interviewing on Bloomberg, I believe a therapist who specifically deals with what he terms crypto addicts. This is not talking about long-term investors that are investing in Bitcoin or Ethereum, for example, along with a portfolio of other really great businesses.

It's talking about these investors that will sometimes find the newest shiny crypto, even if they may be don't understand fully what's behind it, it's very obscure in terms of what the business says and this just a feeling of that you can get rich overnight and that there's actually all of these besides, for their finances, other really serious long-term ramifications from that. It's this idea of you can gamble --

Jason Hall: It's gambling addiction is what it is, it's not crypto addiction. It's gambling.

Rachel Warren: Yes, it's a gambling addiction and it's this idea of that trading stocks or trading some digital currency, that it should look a lot more like gambling than a solid investing thesis.

I think that is so backwards. For me, I think if your thesis about any company is coming from a position of more like gambling, timing the market kind of position rather than the actual business itself, that's where you're coming from more of a meme stock perspective.

But anyway, a little rabbit trail there, but that's just struck me recently as I was studying it.

Jason Hall: It was a fun journey, Rachel.