The Return Of RoaringKitty: Why You Should Still Care About Meme Stocks

The memes were nearly are the same:

We are so back!

This was the widely held conclusion from the sudden return of "Roaring Kitty" on X (Twitter) two Sundays ago. Roaring Kitty is the online moniker of one Keith Gill. Mr Gill is a former financial analyst who first brought attention to the video game rental company back during the retail trading heyday of the pandemic.

Roaring Kitty hadn't been active on (any) social media in several years and when that changed over the weekend, so did GameStop's fortunes, at least briefly.

Here is what he cryptically Tweeted, er, X'ed:

Doesn't seem like much but it was enough!

It was his first tweet in nearly 3 years and predictably, caused a jump of 73% in GME's shares. Another famous meme stock, AMC, had a similar day rising 77%.

This continued the next day with other large moves until the both companies had gone well above 100% over a two period. For Gamestop, this meant its valuation reached roughly 1900 times its present earnings. As a reminder, 20 times present earnings is very good and 40 is considered extremely expensive. For context Nvidia, the company that is consistently making more money than even its more optimistic owners

Is it any wonder that people were saying things like:

“Welcome Back, KING,” on X.

Thousands of times earnings is......nuts. It is also tricky to discuss let alone analyze. It suggests that the company's share price is totally unmoored from reality. This means it will likely come down to earth at some point but, like an escaped balloon soaring into the sky, it could sail to heights far beyond comprehension.

What to say about this that hasn't already been said?

First let us start with some much-needed context

This newsletter missed the true peak of the meme stock insanity. That occurred in 2020 and early 2021 when this newsletter (and this company!) was first taking form.

​We did cover the company in later 2021 when it was quietly having a second moment in the sun.

There have been a few second dawns since the first great "Meme Stonk" episode at the tail end of the pandemic. You can easily see them on the company's stock chart.

Nothing too earth shattering to take away here besides the obvious: the stock has trended steadily down after each leap and almost certainly will this time as well. Gamestop is still a bad business that loses money and the meme stock hordes, no matter how passionate they are, won't change that fact.

We were also gratified at the lack of questions from our readers. That wasn't the case for some of the other - all too brief - meme stock resurgences. We always welcome questions or concerns (seriously!) but also take them as a barometer for how seriously a given question or topic is being taken.

We were therefore quite pleased that no one was terribly interested this time around.

In case there is any confusion on this point: please, please do not partake in any online driven excitement about "degen" meme stocks.

So why write about it then? Who cares?

Because of how much this phenomenon has changed investing.

First and foremost, it reminds us about just how much Keith Gill and his friends and community of believers were able to achieve back in 2021 and 2022.

As Roaring Kitty's tweet and the subsequent price action demonstrates, those achievements are still reverberating. They don't just have staying power, however. They have also caused two big NEW changes that we can see today.

We cover the first here and the second in the next section below.

The first is actually derivative of a point we made many years ago:

We argued back in 2021 previously that the Roaring Kitty launched "Meme Stonk" phenomenon has fundamentally changed markets. It has mostly impacted active investors who try and make "easy" alpha by shorting companies in deep, deep distress.

It is actually surprising difficult to short companies successfully and a lot of investors and hedge funds do it to try and balance their longs to protect themselves in case the market reverses. Others however, try and make some easy money betting against companies that are doomed to fail. The idea being that betting that a 5 cent stock could fall to 4 cents might be less profitable but far more likely than doing so elsewhere.

The meme stock mania changed all of this permanently. By demonstrating that a passionate and charismatic though unknown figure could rally and unite hordes of retail investors behind an interesting but deeply flawed company, Mr Gill demonstrated that this could be very, very risky for even the most nimble and sophisticated investors.

He leveraged the power and reach technology to do so. Be combining the network effect of online communities and cheap and easy trading with the timeless power of narratives, THE Roaring Kitty changed the investing game.

What is amazing is some very smart people forgot the lessons of 2020 and 2021. Gamestop was, just a few weeks ago, one of the shorted stocks in public markets. This has proven to be, once again, a major, major mistake.

The difference between today and 2021 is many of these "smart" investors were all too aware of the risk. They were just too arrogant to think it could happen again without them some signs or signals that they would pick up first.

Oops.

Just think of the shock and horror they must have felt! You know what they say, fool me once shame on you, fool me twice.....

One minute you are a hedge fund kingpin sitting there safely short Gamestop stock and feeling completely confident that it is overvalued and heading towards bankruptcy. The next minute some guy tweets a single image and your entire position and perhaps a large chunk of your year's profits have been obliterated.

Keith Gill didn't even tweet a single word and he obliterated the shorts in a handful of the most shorted stocks AGAIN. And he did it from who knows where in a blink of an eye.

The difference is: this time you can't tell your investors that you had no warning that this was possible. Everyone and their investors remembers the power of RoaringKitty and what he can wreck.

Humbling.

*******

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