camila June 14, 2021

NEW YORK (BLOOMBERG) – Trying to keep up with the frenzied rise of so-called meme stocks might feel a bit like playing a game of whack-a-mole, bewildering analysts and investors alike.

While there is no steadfast definition of what constitutes a meme stock, one common thread across the many names being pitched on social media is a focus on heavily shorted companies. Shares of Reddit icon GameStop jumped as much as 2,500 per cent in January after day traders noticed its short interest had ballooned to record levels.

Investors looking for other stocks that might fit that mold will find nearly 230 firms with a market capitalisation of at least US$100 million (S$132.6 million) and short interest of 15 per cent or more, according to S3 Partners data compiled by Bloomberg. More than 80 per cent of those names have managed positive returns over the last month, with the average gain sitting at about 18 per cent, while the S&P 500 Index rose 2.3 per cent.

Among the most heavily shorted stocks are names like Clover Health Investments, Workhorse Group and Geo Group, which have already caught the attention of retail traders in recent days.

Meanwhile, Bumble and Petco Health and Wellness, both fresh off initial public offerings this year, find themselves on the outside looking in as part of the few companies on the list that have not seen outsized gains over the last month. Joining them is ad-tech firm PubMatic, which boasts the highest short interest at 54 per cent, recreational boat retailer MarineMax and biotech company Black Diamond Therapeutics, which has plunged more than 50 per cent over the last month.

While these sudden rallies can create lucrative returns for investors in the blink of an eye, the extreme volatility that accompanies them can quickly catch traders offside, leaving them holding the bag as shares plunge back to earth.

After opening the week with a 32 per cent gain, Clover Health’s shares jumped by as much as 142 per cent over the next two days. But, by the close of trading on Thursday (June 10), anyone who had bought and held shares after Monday’s pop was now underwater.

“I can’t imagine this is going to continue in the same form or fashion for much longer,” said Baskin Wealth Management chief investment officer Barry Schwartz.

“Just because something is shorted doesn’t mean buying it is going to work out for you,” he added. “You’re playing with fire.”