There’s no question about it. Meme stocks are risky. Any stock that is volatile enough that it can jump by more than 20% in a given day can send your portfolio on a wild roller coaster ride. However, that doesn’t mean you should always avoid these types of stocks.
Over the long term, stocks such as Sundial Growers (NASDAQ:SNDL), GameStop (NYSE:GME), and AMC Entertainment (NYSE:AMC) could turn out to be great investments. Although there is considerable risk with investing in these stocks, the potential returns may be significant.
1. Sundial Growers
Earlier this year, Sundial Growers’ stock hit a high of $3.96. And while it’s nowhere near that price today, the bullish activity that retail investors and speculators helped generate around Sundial allowed the company to raise millions through multiple share offerings. On May 7, Sundial reported an unrestricted cash balance of 753 million Canadian dollars, up from just CA$60 million at the start of the year. Since then, the company has been busy wheeling and dealing, even setting up a joint venture with SunStream Bancorp to pursue investments in the cannabis sector.
Admittedly, I’m not a fan of Sundial for its existing business; its revenue has been falling and sales of CA$57 million over the past 12 months are less than the CA$72 million OrganiGram has generated over a similar time frame. And yet, Sundial has twice the market cap. But cash can create opportunities for the business. As Sundial acquires or invests in other cannabis companies, it can become a much stronger and more stable investment over the long run.
The poster child for meme stocks is, without a doubt, GameStop. The video game retailer looked like its future was doomed in an era where people are making more of their purchases online. But there’s hope for the company, with its new Chairman Ryan Cohen leading a transition toward e-commerce and away from brick-and-mortar stores. GameStop is also getting in on the non-fungible token (NFT) hype, recently launching a new site dedicated to NFTs and announcing that it is looking to hire a variety of positions for the new area of its business.
Like Sundial, GameStop took advantage of its growing popularity — its shares have soared more than 1,300% year to date (the pot stock has risen 140% while the S&P 500 is up just 12%) — and it recently issued 3.5 million new shares to raise $551 million. All that additional cash can help fuel its transformation and allow the company to pursue other growth opportunities as they come up.
The one big risk with GameStop, however, is in determining what price to pay for the stock. While it may be appealing to buy if it falls below $150 (which is around its recent lows), it closed last week at $100 higher than that price. Even if you decide that GameStop is worth the risk, it’s important to have a price in mind as this fast-moving stock has proven to be unpredictable this year.
Shares of AMC have skyrocketed even higher this year and are up more than 2,300%. However, the company is also the riskiest one on this list. It faces significant challenges ahead with long-term debt totaling more than $5.4 billion. And with cash and cash equivalents of just $813 million as of March 31, it would have looked like an unlikely scenario for AMC to dig itself out of this hole. But its strong share price could help alleviate some of those concerns.
On June 3, the company announced that it brought in $587 million from a new offering. That brings the total additional equity it has raised during the quarter to $1.2 billion. AMC is now exploring possible acquisitions within its industry, which could lure in more growth-oriented investors. Meanwhile, it is also seeking shareholder support to issue 25 million more shares.
Now that the economy is opening back up and people are back to visiting movie theaters, the near future looks brighter for the company, especially with all that extra equity and the possible growth opportunities ahead. While there is still significant risk here — AMC has burned through $1.3 billion in cash from its day-to-day operating activities over the past 12 months — there is also potential for the company to rise in value. However, a lot of AMC’s long-term success will ultimately depend on what opportunities it ends up pursuing, its debt load, and if demand returns to pre-pandemic levels. These are still some very big question marks today.
But even if you’re a risk taker, like with GameStop, you’ll want to be careful with what price you pay for this incredibly volatile stock. AMC is just coming off a new 52-week high.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.