Meme Stocks Giving Rise to Morality Questions

In what has simultaneously been one of Wall Street’s most bizarre and yet transformative phenomena, the rise of meme stocks — loosely defined as publicly traded securities with incredibly strong social media followings — quickly captured the world’s attention. Reportedly, at the heart of this movement’s ethos is the universal desire to restore equity from injustice. But its latest venture could undo whatever good it initially sparked.

Kicking off the meme stock spectacle was of course GameStop (NYSE:GME), the video game and consumer electronics retailer. For years, GameStop had struggled for relevance as the underlying industry shifted toward e-commerce revenue channels. Then, the pandemic struck, derailing what was a slight hint of a comeback as GME entered 2020. Not surprisingly, short traders saw a profit-taking opportunity, given GameStop’s many non-pandemic related headwinds.

However, chatter spread on social media forum, regarding bearish traders’ overexuberance toward the GME short play. Through coordinated action, the little guys on the opposite side of the trade attempted a short squeeze, or the deliberate bidding up of a stock to force short traders to cover their position, thereby inducing more bullishness. Such moves, though extremely risky, can be extraordinarily lucrative.

As Jamie Cohen, a digital culture expert with a PhD in cultural and media studies stated in an interview with Time, this was more than just about profiteering. Rather, it was about fighting back against a corrupt system that average everyday individuals felt contributed to their disenfranchisement.

An article from TechCrunch.com added weight to this underlying morality of meme stocks, reporting that social media users relished their newfound contrarianism. To them, this was to some degree revenge, delivering a magnitude of comeuppance that the Occupy Wall Street movement years earlier could not.

Later, AMC Entertainment (NYSE:AMC) surged on a similar justification. As well, many meme stock participants saw a higher purpose in their market activism, essentially protecting their favorite childhood institutions from the ravages of corporate greed.

Indeed, the movement had some level of moral credibility, until it wandered into the lap of Geo Group (NYSE:GEO). (See Geo Group stock chart)

Meme Stocks Take a Questionable Turn

As a private prison, Geo Group doesn’t enjoy many overt backers. Even in the best of times, GEO was a controversial investment. Today, it’s considered nearly odious. For instance, both former President Trump and current President Biden championed criminal justice reform during the 2020 electoral campaign. Early this year, Biden signed an executive order to phase out private prisons.

Just from a purely economic perspective, then, an investment in GEO would make little sense. As they did with GME earlier, short traders sniffed an opportunity. This time, though, some of them must have imagined that the Reddit crowd would leave them alone. Unlike other meme stocks, GEO offered no discernible moral value.

Yet once again, the bears got caught flatfooted. Though short traders managed to drive down GEO to around the $5 level, the social media crowd sprang into action. At one point, shares closed up near $9 before settling around the $7 range.

While this signifies another victory for traders on Reddit, it’s also possible that it could represent a turning point. For prior meme stocks, the moral directive was clear. By bidding up heavily shorted stocks, social media users could save companies, which in turn would save jobs and in some cases entire industries.

What if a Company Doesn’t Deserve to be Handed a Lifeline?

For that question, Reddit traders can point to the capitalist ethos. However, by doing so, they surrender the moral high ground, basically making them no better than the short traders they earlier claimed to loathe.

More critically, research over the years from sources such as McKinsey & Company reveals that young consumers are willing to pay more for sustainable goods and support brands that practice environmental and social responsibility. Logically, this suggests that younger investors’ advocacy for meme stocks can only go so far.

Perhaps it might even reverse.

Wall Street’s Take on Geo

The analyst rating consensus on GEO stock is a Moderate Buy, based on 1 Buy and 1 Sell rating. The average analyst Geo price target is $11.63, implying a 52.6% upside.

At the same time, bloggers are more enthusiastic about the stock. According to Tipranks’ Blogger Sentiment measure, GEO blogger sentiment is 77% bullish, above the sector average of 70%.

Showing the Cards Too Early

The biggest threat to meme stocks might not even be the underlying morality or lack thereof. Instead, it’s that the activists are exposing themselves as predictable and one-dimensional.

If there was a substantive ethos driving the meme stock narrative, the challenge for the Wall Street short trader is to crack it. On the other hand, if the only factor for meme-ing something is a stock’s short interest, the absence of creativity in the playbook would presumably hand the advantage over to the bears.

Ultimately, this social media-driven phenomenon appears as a modern-day adaptation of George Orwell’s satirical novella Animal Farm. What started out as a seemingly sincere attempt at restoring financial equity might have ironically devolved into little more than a cynical cash grab.

Disclosure: The author held a long position in GME and AMC.

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