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Meme stocks, according to Michael Burry, are the latest Wall Street fad that might harm everyday investors.
Getty Images/Astrid Stawiarz
Long before Reddit swamped online boards with individual investors debating about
GameStop,
Michael Burry, an investor, noticed an out-of-favor stock that had been misinterpreted. Burry now sees echoes of 1999 and 2007—periods of market frothiness in the past. “I don’t know when meme stocks like this will crash, but we won’t have to wait long,” Burry told Barron’s via email. “I believe the retail populace is completely involved in this idea, and Wall Street has ridden on the coattails.” “We’re running out of fresh cash to get on the bandwagon.”
Burry, whose successful bet against the housing market ahead of the subprime mortgage crash earned him a prominent role in the book and film “The Big Short,” believes meme stocks are the newest Wall Street fad that might harm normal investors. He claimed that in 1999, everyone who had made money on dot-com stocks thought the trend would continue. In 2007, individuals who were generating money by “leveraging to the hilt in numerous properties” expected this to continue. “Momentum and social media are now part of Wall Street’s strategy, and they are in a better position than retail to participate, sniff out, and start gamma squeezes in the options market,” Burry added, referring to heightened demand for shares fueled by market makers rushing to hedge call options they sold, a phenomenon that likely fueled meme stock trading. In the second half of 2019, Burry became a high-profile GameStop (ticker: GME) bull. In August of that year, he told Barron’s that anxieties regarding disc-less consoles were exaggerated. When new consoles from Sony and Microsoft were released, he expected free cash flow to improve.
Sony
and
Microsoft
In 2020, they will be released. Retail investor Keith Gill praised Burry’s bull argument on the now-viral RoaringKitty YouTube channel, which predicted the GameStop squeeze possibility. Burry couldn’t have predicted the epidemic or the resulting console shortages, but his thesis was proving correct when shares began to rise in the second half of 2020. “However, I’ll be thrilled if I can get a thesis to come true within years,” he says. “The majority of people are concerned with days, weeks, or months.” Chewy shares soared back to double digits in 2020 when co-founder Ryan Cohen announced a 9% ownership in the company and called for big improvements. According to regulatory records, Burry sold what was remained of his GameStop share for a profit during the fourth quarter of last year. When asked about companies like GameStop and Best Buy, he said,
AMC Entertainment Holdings is a company that produces movies.
Burry points out that GameStop was purchasing back millions of dollars in stock at his suggestion not long ago, despite the fact that (AMC) has sold millions of shares into skyrocketing stock prices. Companies should sell shares, he believes, as long as they respect the law. “This is a blessing in disguise for these businesses,” Burry noted. “However, as many public companies will attest, simply having cash on hand does not guarantee large market multiples.” Connor Smith can be reached at connor.smith@barrons.com./n
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