During the meme stock frenzy of 2021, GameStop, AMC, and other stocks showed strong trading correlations; at the time, these stocks were linked by their high short interest and were often put into the same "meme stock basket."
While GameStop's business fundamentals are not a major concern, its performance might still be influenced by sentiment spillover from other meme stocks such as AMC, despite reduced volatility and correlative trading across meme stocks since 2021.
GameStop and AMC’s performance
GameStop's shares have been performing poorly mainly since mid-June after the company’s Q1 earnings saw a big executive shake-up. And things have only gotten worse since the end of July - today, shares are down 5% YTD.
Meanwhile, shares in movie theater chain AMC Entertainment, which, like GameStop, has been labeled a "meme stock" since early 2021, have plummeted as the company prepares for a substantial dilution of its outstanding shares via new equity offerings.
Shares of AMC dropped nearly 70% over the past several days on news of the conversion of AMC Preferred Equity (APE) units and the implementation of a one-for-ten reverse stock split.
Below, we’ve charted the performance of both AMC and GME over the last several months.
The “meme stocks” basket
During the height of the meme frenzy of 2021, meme stocks such as GameStop, AMC, Bed Bath & Beyond, BlackBerry, and several others tended to have a strong trading correlation, even though these companies were spread across diverse and often unrelated industries. The main thing these stocks had in common was their massive short interest.
Theories regarding the existence of a "meme stock basket" emerged from the retail trading community during this period. These theories held that portfolio swaps - derivatives that could offer a firm exposure to a basket of underlying equities without the firm actually having to hold those equities - were being used to effectively package synthetic short positions in meme stocks.
Using portfolio swaps, hedge funds and other institutions could bet against entire baskets of meme stocks simultaneously, which could have explained both the downward pressure on these stocks and the fact that their trading seemed to be correlated.
As it turned out, however, swaps were not bombproof investments. In March of 2021, Archegos Capital went bankrupt due to its swap exposure. And that bankruptcy happened to occur just a couple of months after GameStop and other meme stocks saw massive squeezes in January of 2021.
The so-called synthetic short positions generated via swaps are still largely unregulated today.
GameStop is now more disconnected from its fellow meme stocks
Unlike many of the “protagonist” retail stocks that rose during the meme stock frenzy, GameStop has maintained its business in a relatively stable condition and has not had to turn to multiple rounds of equity offerings to raise cash. The video game retailer's shares continue to trade at much higher levels than they did in 2020, and the company’s loyal retail shareholders have largely held their ground over the past two and a half years.
In recent years, GameStop’s trading has become more correlated with the overall market. Today, GME’s beta with the S&P stands at about 2, meaning it tends to move in the same direction as the S&P, though with twofold magnitude.
All that being said, although GameStop stock is much less volatile today than it was in 2021, spillover effects from meme stocks still considered to be in the same “meme basket,” such as AMC, could continue to have an impact on GameStop's performance. Thus, GameStop’s dismal past couple of months may be - at least partly - to blame on its meme stock brethren.
