Meme Stocks, Pot Stocks, & How to Maximize Gains
Earlier this year, a Pandora’s box of sorts opened: meme stocks. And much like in the ancient myth, with this power unleashed upon the world, there’s no turning back.
Meme stocks are here to stay. Whether that means we see further market moves as a result of investors coordinating on “Reddit” forums, meme stocks will impact the stock market for years to come.
Marijuana stocks were for a time considered meme stocks, but will that happen again?
And more importantly, could a pot stock see a 90-times increase of accounts trading its shares in a single day, like GameStop Corp. (NYSE:GME) did in early 2021? (Source: “Almost 900,000 Accounts Traded GameStop at Peak of Meme Stock Craze,” Financial Times, October 18, 2021.)
First, it’s important to make the necessary distinction between meme stocks like GME stock and marijuana stocks.
Lessons From the GameStop Stock Rally
Before it skyrocketed, GameStop stock had been heavily punished by short-trading institutional investors who considered the company’s business model outdated.
They, of course, had a point (many video gamers opt to buy their products online nowadays), but the overwhelming number of short positions against GME stock was what ended up pushing a small army of retail traders over the edge.
In their view, it was simply outrageous that a company could have more stocks sold short than there existed on the market (a theoretically possible occurrence that speaks to the somewhat incomprehensible nature of our financial system).
In any case, early this year, retail investors rallied behind GameStop Corp., which, leading GameStop stock to rise higher than it had in years.
GME stock’s gains got so extreme that many of the hedge funds and other institutional owners of short positions in the company made enormous losses and had to close their short positions.
Then, after GameStop stock went back down, many retail investors suffered huge losses.
The same thing, to an extent, happened with pot stocks later this year, sparking a huge run in many of the top marijuana stocks. But there’s a marked difference between the two types of stocks, and that has to do with their positions in their respective industries.
GameStop Corp., for all its newfound support from retail stock traders, is still following what is, by all indications, a dying business model.
Which isn’t to say the company has no future or that the outrageous number of short positions in GME stock were justified. For what it’s worth, I personally enjoyed seeing the act of market rebellion undertaken by retail investors.
It’s still hard, however, to see how GameStop stock can grow, moving forward.
Marijuana Stock Forecast
Pot stocks, by contrast, have a very clear growth path ahead of them. It’s contingent, however, on the slow-moving expansion of marijuana legalization around the world, including at the U.S. federal level.
This reliance on glacier-paced politics is frustrating and can be fraught with false starts that send marijuana stock prices soaring, only to have them fall back to Earth.
But here’s the thing: glaciers are always moving, imperceptibly so, but still moving. The same goes for marijuana legalization efforts the world over.
There will eventually be a spate of pot legalization; of that, I have very little doubt. The question is just a matter of when.
You never can really predict these things. Canadian marijuana legalization kind of came out of nowhere, after all. The same thing could happen at the federal U.S. level or in Germany. Pot legalization in either of the two countries would likely send pot stocks surging.
Another distinction is that marijuana stocks aren’t as artificially deflated as GameStop stock was. With all the short positions, GME stock was thought to be a dead man walking, a company with no chance of redemption.
The market often has a herd mentality. With institutional investors seeing a massive number of short positions in a company like GameStop Corp., there’s almost a self-fulfilling prophecy.
Many institutions take out short positions in stocks that appear to be doomed, leading to a reduction in confidence in that stock, leading to more short positions.
Pot stocks don’t share that problem at all. But what marijuana stocks do have in common with GameStop stock, and why their status as meme stocks could become great, is that they’re undervalued.
Considering how much revenue marijuana companies make, and how much the pot market continues to grow, it’s only a matter of time before we see a massive rally by pot stocks.
And with institutional investors unable or unwilling to invest in that bright future (as is the case with U.S. marijuana stocks, due to their illegality at the federal level), there’s an opportunity for retail investors to once again send pot stocks soaring.
While you don’t necessarily want to follow memes as part of your investment strategy, being aware of them is of utmost importance, considering how powerful the meme stock movement has been.
To that end, marijuana stocks could very well become the target of another meme rush. With pot stocks’ currently deflated prices that don’t match their real value, many investors could profit immensely from another meme stock run.