Sell the Meme Stocks in May and Go Away?

Key Points

• Keith Gill's return to X sparked a meme stock surge, but GameStop (GME) and AMC (AMC) crashed after announcing share offerings.
• GameStop dropped 45% in five days, announced declining first-quarter sales, and plans to sell 45 million shares in an at-the-market offering.
• AMC fell 23% in five days, nearly returning to pre-mania levels, as it also announced an offering.

Last week, the market experienced a flashback to the meme stock mania of 2021. Keith Gill, famously known as RoaringKitty, reemerged on X, sparking a renewed frenzy among retail traders. Shares of iconic meme stocks like GameStop NYSE: GME and AMC Entertainment NYSE: AMC soared on remarkable trading volumes. However, the excitement was short-lived as both companies retraced and announced stock offerings, significantly diluting their shares and causing a swift price decline.

So, is it time to sell the meme stocks in May and walk away?

GameStop

GameStop experienced a dramatic rise following RoaringKitty's tweet last week, but the announcement of a share offering abruptly halted the rally. The stock spiked initially, driven by retail investor enthusiasm, but quickly gave back its gains. Over the last five days, GME has been down 45%, and the company announced that its first-quarter sales have dropped. 

It filed to sell up to 45 million common shares in an at-the-market offering, further diluting existing shares. Fundamentally, nothing has changed for GameStop; the company faces the same operational challenges. Analysts remain skeptical about its long-term prospects, especially given the dilution of shares, which may further strain investor sentiment.

AMC Entertainment

AMC followed a similar trajectory, with its stock surging briefly before plummeting after the announcement of a share offering. The stock is down 23% over the last five days, trading almost back to where it was before the meme mania. Despite the initial excitement, AMC's underlying issues remain unchanged, including its significant debt load and ongoing challenges in the theater industry. The dilution of shares has added to the bearish sentiment, and many analysts believe that the stock will likely revert to pre-frenzy levels as the hype fades.

Faraday Future Intelligent Electric Inc.

Faraday Future NASDAQ: FFIE posted unbelievable gains while not as prominently featured in the recent meme stock wave as GME and AMC. The stock saw incredible momentum, and despite crashing over 50% from Friday levels, it remains up a whopping 2,200% over the previous month. This is largely thanks to retail investors piling in, hoping for a short squeeze, which certainly played out. 

The electric vehicle manufacturer has been struggling with production delays and financial issues, and despite the temporary boost, the company's fundamental problems persist, and it is expected to continue facing significant hurdles in scaling its operations. After multiple delays in filing its earnings report, the company is set to announce its latest earnings on Tuesday, May 28.

BlackBerry 

BlackBerry NYSE: BB experienced a modest rally, riding the coattails of the broader meme stock resurgence. However, the company remains focused on transitioning from its legacy smartphone business to software and cybersecurity solutions. While this strategic shift has potential, it has yet to translate into consistent financial performance. The recent spike in trading volume and share price is unlikely to be sustainable without substantially improving the company’s core business metrics. The company has a hold rating based on six analyst ratings and a price target of $4.08, forecasting an almost 38% potential upside.

Koss Corporation

Koss Corporation NASDAQ: KOSS saw a notable increase in its stock price during the meme stock revival and has impressively held onto many of the gains thus far. Known for its high volatility and small float, Koss is particularly susceptible to dramatic price swings driven by retail investor activity. Despite the recent excitement, Koss's fundamental business has not seen any significant changes, and the stock is likely to retreat as the meme stock hype subsides. Short interest remains modest in the name, with only 0.22% of the float sold short as of April 30.

The Bottom Line

The recent meme stock mania provided some retail investors with a brief, exciting ride, but the underlying issues with these companies remain. GameStop and AMC's stock offerings underscore the reality that these companies are looking to capitalize on the fleeting surge in liquidity, demand, and stock prices to raise much-needed capital, ultimately diluting shareholders.

As the dust settles, it becomes increasingly clear that the fundamental problems plaguing these companies have not been resolved. Investors should be wary of getting caught up in the meme stock euphoria and consider the long-term outlook. The adage “Sell in May and walk away” might be particularly prudent advice in the context of these meme stocks as the excitement fades and reality sets in.