The Economist - USA (2021-02-06)

The Economist February 6th 2021
Graphic detail Stockmarkets

73

Sweetmemesare

made of this

M

ost investorswere stunned when
the share price of GameStop, a chain
of video-game shops, rose by 2,265% from
the start of January 13th to mid-morning on
January 28th. But for denizens of the Red-
dit forum r/wallstreetbets, the surge
capped a long campaign singing the firm’s
praises. Share prices of other names touted
on Reddit, like amc(a cinema owner) and
Express (a fashion retailer), also soared.
Media coverage of these movements
has focused on a “short squeeze”: Reddi-
tors forcing investors who had bet against
these firms to close positions. This does
explain some of GameStop’s run-up. How-
ever, many other “meme stocks”, such as
BlackBerry, a smartphone maker, were not
heavily shorted. If Reddit’s madness has a
method, short interest does not capture it.
A better measure of what sets Reddi-

tors’heartsaflutterisa rankingonStonks

News, a website, of how often stocks have

been cited on r/wallstreetbets since Janu-

ary 26th. Although novel, the list overrates

firms whose tickers are also words, like

ServiceNow (which trades as now) and The

RealReal (real), because a post saying “It’s

real now!” will add to their tallies.

At our request, Venkatesh Thallam, the

site’s creator, has shared a stricter ranking.

It counts only words that contain a “$” or

are in upper case—both markers for tick-

ers. After culling names like ProPetro

(pump) and dmcGlobal (boom), we derived

a recognisable list of current meme stocks.

We then examined what these names

had in common. So that the GameStop-

amcduo did not dominate our analysis—it

got 55% of all references—we modelled the

chances of each stock in the Russell 3000

index receiving at least ten mentions. De-

spite treating names with ten references

the same as those with 10,000, this still

identified GameStop as the trendiest firm.

Short interest was tied to popularity on-

ly loosely. For every oft-discussed, heavily

shorted firm, there was also a popular but

rarely shorted name, or a widely shorted

stock with few mentions. Trading volume

andmarketcapitalisationmatteredmore.

The best predictor was the ratio of call op-

tions—which grant the right to buy a share

at a set price, without obligation—to total

shares. This tracks short-term bullish bets.

This model flags firms that look like

meme stocks, but are not yet on Redditors’

radar screens. They include heavily short-

ed names like Discovery (of the Discovery

cable-tvchannel) and SunPower (a solar-

panel maker); the covid-19 vaccine firms

Vaxart, Novavax and Moderna; and both

sides of the merger of a division of DuPont

with International Flavors and Fragrances.

Investors should not race to buy these

names. We may have missed a variable that

would explain why Redditors shun certain

stocks. If Redditors themselves are buying

up options on their favourite shares, they

may keep ignoring others with heavy call

volume. Posts on r/wallstreetbets could

merely represent chatter about past vola-

tility, rather than anticipating future

trends. And meme stocks can suffer big

dips: GameStop is down 80% from its peak.

Yet such concerns haven’t stopped Red-

ditors from betting big. If you think invest-

ing is more about adrenalin than about

owning a slice of a good business, dig in.

What the favourite stocks of
r/wallstreetbets have in common

1

0

10

100

1,000

10,000

50,000

300

200

100

0

2019 20 21 2019 20 21

30

20

10

0

30

20

10

0

2019 20 21

100

75

50

25

0

100

75

50

25

0

100

75

50

25

0

2019 20 21 2019 20 21 2019 20 21

Modelled probability that a share will have at least ten mentions, %

GameStop

BedBath

& Beyond

AMC

American

Airlines

Tesla

Apple

SunPower

Palantir

BlackBerry

Vaxart

Moderna

Novavax

IFF

AMD

Catabasis Pharma

Discovery

DuPont

Academy

Sports

Sumo Logic

0255075100

Shortinterest

11

*Portionofshortinterest borrowed externally by broker-dealers

†For a share with a 50% chance of having at least ten mentions,

increase in probability associated with a one-standard-deviation

increase in each variable, holding other factors constant

Sources: Bloomberg; IHS Markit; Venkatesh Thallam

Volatility

4

Marketcapitalisation

16

Dailytradingvolume

20

Ratioofcalloptionstooutstandingshares

27

→Redditorsmayhavehelpedtriggera shortsqueeze,butcalloptionsarethebestindicatoroftheirwhims

Threemost-mentionedsharesonr/wallstreetbets,Jan26th-Feb1st 2021

Modelledprobabilitythata sharewillhaveatleastten
mentionsonr/wallstreetbetsv actualnumberofmentions
Jan26th-Feb1st 2021

Impactonprobabilitythata sharewillhave

atleasttenmentionsonr/wallstreetbets†

Percentagepoints

GameStop44,733mentions AMCEntertainment17,898mentions BlackBerry14,084mentions

Price, $ Short-selling (externally borrowed shares as % of outstanding shares*)

Actual number of mentions, log scale

Bubble size=
market capitalisation

Drop due to increase in number

of outstanding shares, not

reduced borrowing

BlackBerry shares have rallied,

even without enough short

interest for a “short squeeze”