Meme Stock Disaster – Why Bed Bath & Beyond Went Wrong by Agne Vaitkeviciute
Meme Stock Disaster – Why Bed Bath & Beyond Went Wrong…
You may have noticed the appearance of US home goods retailer Bed Bath & Beyond in Watson's Daily recently. Talk about drama!
On August 17th, the share price of Bed Bath & Beyond (BBBY) suddenly fell by more than 50% after a short period of intense rallying.
The crash has largely been attributed to the company's status as a meme stock. The term first appeared back in January 2021 to describe groups of retail investors congregating online and collectively buying stocks of down-trodden companies being 'shorted' by institutional hedge fund investors.
BBBY's experience exemplifies just how volatile and financially dangerous meme stocks can be. Temporarily inflating a company's stock price obscures its weak fundamentals. With little prospect of generating long-term returns, these stocks will ultimately come crashing down, taking the funds of amateur investors with them.
WHY IS IT INTERESTING?
The rapid rise and fall of the stock coincided with financial influencer Ryan Cohen's complete sale of his 11.8% share in BBBY on the day of the crash. As a prominent meme stock figure, many inexperienced investors take his tweets as gospel for their own investment strategies (he was famous for founding Chewy and being its CEO until 2018 and later, being the chairman of GameStop). However, this remains a very speculative way of deciding where to invest one's money as it doesn't consider the inherent value of the stock at all.
Also, Cohen's sale shows how the meme stock general culture of HODL'ing – 'holding on for dear life' to a stock and not selling – goes against how markets work. Eventually, someone WILL sell, and the value of the company WILL go down.
What BBBY's experience shows is that inflating a stock's value because it is a 'meme' will not change a company's fundamentals, and therefore practically guarantees its value will eventually decline. BBBY itself has been facing terrible financial problems for a while now. Even the company's CFO, who sold a significant portion of his shares just a month ago, 'fell' to his death shortly after the stock's crash! Although not confirmed as a suicide, it might give the impression to investors that the CFO knew the worst was yet to come, and thus another reason to send the share price falling even further.
No matter what happened with BBBY, meme stocks are not going away anytime soon. Financial insecurity, amplified by the current economic climate, has generated an increased appetite for risk among young investors. Going forward, companies will need to consider the growing influence of retail investors and find ways to harness their power to their advantage.
Moreover, meme stocks divert capital to companies with poor fundamentals instead of companies who can create real value for the economy. This is definitely something to keep an eye on as it could eventually have negative repercussions on a country's economic prosperity.
That being said, the chaos of BBBY further highlights the need for regulators to work hard, and fast, to ensure that the meme stock craze does not cause further damage to both the market, and the financial health of retail investors. Regulation, however, is not easy when financial markets are meant to be public and accessible to all.
This article was written by Agne, an incoming PGDL student at the University of Law, competition law geek and chef in an alternate life who holds a personal grudge against London's air pollution for making her allergic to grass.