The best Reddit stocks (and Dogecoin) have created bubbles. Here’s what to do next.
What two things do electric vehicles (EV) and marijuana stocks have in common? First, both industries became favorite lovers of retail investors last year. Many companies in these industries became known as “top Reddit stocks” due to their prominence on the freewheeling r / WallStreetBets subreddit. Source: TY Lim / Shutterstock.com The second similarity is less clear: both were “Top Reddit Stock” bubbles that burst this year. Regular investors may have missed that the average top 10 stock in each industry is down 60% from its peak. Analysts expect more losses to come. Still, Reddit’s stock bubble is unlike anything we’ve seen before. Rather than freaking out investors, these bubble bursts have caused more manias in their wake. This week, Dogecoin (CCC: DOGE-USD) briefly became the fifth-largest cryptocurrency, despite no clear ambitions for real-world use; Investors who bought $ 10,000 DOGE in January could have sold out for nearly $ 1 million last week. InvestorPlace – Stock market news, stock advice and trading tips Meanwhile, traditional investors are starting to worry about missing out on something. Investments that were once banned, such as Tesla (NASDAQ: TSLA) and Bitcoin (CCC: BTC-USD), have gone mainstream as institutional investors strive for returns. “Institutions are buying up more bitcoin per month than those being mined,” said Alessandro Andreotti, an over-the-counter (OTC) Bitcoin broker. “There just isn’t enough for everyone.” Even riskier bets have happened since then. 7 Retail Stocks With Locked Ecommerce As Wall Street tries to beat Reddit investors at their own game, they will inadvertently create opportunities for smaller investors to win. That’s because when it comes to investing in bubbles, speed is often the only thing that separates the winners from the losers. Top Reddit Stocks of 2021: Bubble After Bubble Tell an old Reddit investor their bubble just burst, and you can expect a blank look in response. Top stocks in Reddit, from GameStop (NYSE: GME) to Marathon Patent Group (NASDAQ: MARA), are still up thousands of percent since early 2020. However, ask a Wall Street investor and another truth will emerge. Many of these investors have lost billions by getting into the game late. Tesla stock owners saw $ 250 billion in value melt away earlier this year. Top investment banks lost billions after sticking to high beta bets. What happened? The simple explanation is that Wall Street has overestimated valuations. In January, Tesla’s market cap of $ 840 billion made it as big as the following 10 legacy automakers combined. Viacom (NASDAQ: VIAC) and Discovery (NASDAQ: DISCA) – turnaround mode companies – had price-to-earnings (P / E) ratios that put them in the same league as Apple (NASDAQ: AAPL) and Facebook (NASDAQ). : FB). High beta stocks had to be corrected. However, there is a deeper fundamental reason. In a quest for immediate returns, slower institutional investors have begun to mimic retail investors’ appetite for risky bets. A new bubble economy was the only logical outcome. Reaching for yield, Reddit style In the world of fixed income, bond traders refer to this risk-seeking behavior as “reaching for yield.” This is how it works. In good times, conservative bond buyers will often delve into riskier issues in hopes of earning higher returns. That bumps people with moderate risk tolerances against assets with higher volatility, and so on. It’s a strategy that works wonderfully until it suddenly stops working. (The collateralised mortgage obligations of the 2008 financial crisis were among these “reaching for yield” assets.) Today, a similar effect has occurred when investing in stocks. As the hot money rushes into the stock market, active funds have seen their styles drift into the risky. According to data from Thompson Reuters, Tesla now makes up 6% of the Growth Fund of America (MUTF: AGTHX), one of the largest actively managed funds in the world. (In 2019, the fund held just 0.5%.) Cathie Wood’s ARK Innovation ETF (NYSEARCA: ARKK) has seen a more extreme shift. Last year, the top 10 holdings had a median price / revenue / growth ratio (a PEG ratio for high growth companies) of just 0.15. Today that figure is 0.5. In other words, Ms. Wood’s fund risks a lot more money for less growth potential. Collectively, these Wall Street funds have pushed retail-heavy stock valuations to unimaginable levels. The total value of companies with a price-to-sales ratio of more than 20 is now $ 5.7 trillion, tenfold from last year. Cryptocurrencies have seen similar gains. Meanwhile, Main Street investors have moved on from these regular bets. The interest in finding “The Next Bitcoin” has never been greater. The strategy has richly rewarded retail investors. A $ 10,000 investment in Dogecoin in January 2020 would be worth $ 1.4 million today. Similar gains in GameStop and other “meme” stocks have turned the lucky shareholders into multi-millionaires. The Party Keeps Going The cat-and-mouse investment game just got faster. Consider Dogecoin. #DogeDay had only just ended on Tuesday when SafeMoon (CCC: SAFEMOON-USD), a month-old currency, replaced DOGE as the most searched cryptocurrency in the world. The new coin reportedly punishes sellers with a 10% fee. Other meme coins such as Pirate Chain (CCC: ARRR-USD) saw prices triple within days. The late-to-the-party investors again found themselves holding the bag. Dogecoin prices plunged from $ 0.40 to $ 0.20 just as institutional investors started buying in. It seemed like Reddit investors were always one step ahead. How Investors Can Take Advantage of the Best Reddit Stocks To take advantage of this new bubble economy, investors must follow two essential rules: speed. Investors must act faster than institutional money to avoid becoming brands themselves. Taking profit. Even hot stocks will sink back to Earth if their intrinsic value remains low. The current bubble economy isn’t the first time asset bubbles have formed under broader market optimism. In 2014, investors became fascinated with 3D printing, sending profitless companies such as 3D Systems (NYSE: DDD) to multi-billion dollar valuations. Cryptocurrencies, rare earths and Chinese stocks have also gone up and down. However, asset bubbles are now much more common. One possible explanation is that many private investors have learned to take profits on high-flying investments instead of cutting them to zero. The rise of no-commission options trading on Robinhood has also limited the time horizon that investors can take. And thanks to social media, it has become easier for like-minded investors to make investments. Regardless of why, regular investors can take advantage of being among the first in the door and then leave the party before things end. You may never sell at the top, but it’s much better than being stuck with the Wall Street crowd on your way down. Where do the best Reddit stocks come from? Last November, Ben Foldy, an auto industry veteran, reviewed the shares of electric vehicles competing with Tesla. “There will be winners. And losers. Fast forward to today, and the winners have yet to appear. Several are a stone’s throw from bankruptcy. Some drops are warranted; firms like Lordstown (NASDAQ: RIDE) have supposedly been falsifying orders for months and hiding major mishaps from shareholders Shareholder lawsuits are piling up, but the individual stories mask the more remarkable change investors have seen over the past 18 months. With the rise of free investment and social media, quick-thinking retail investors have suddenly found the tools to outsmart Wall Street. If you are willing to place your bets, you can also understand this fascinating new world. At the date of publication, Tom Yeung held (neither direct nor indirect) positions in the securities mentioned in this article. Tom Yeung, CFA, is a registered investment advisor with a mission to bring simplicity to the world of bel harrows. Note: Top 10 Electric Vehicle Stocks Include Tesla, Churchill Capital (NYSE: CCIV), Lordstown Motors, Nikola (NASDAQ: NKLA), Fisker (NYSE: FSR), Canoo (NASDAQ: GOEV), Nio (NYSE: NIO) , LI Auto (NASDAQ: LI), XPeng (NYSE: XPEV), and Workhorse (NASDAQ: WKHS). Top 10 marijuana stocks are Aurora Cannabis (NYSE: ACB), Hexo (NYSE: HEXO), Canopy Growth (NASDAQ: CGC), Cronos (NASDAQ: CRON), Tilray (NASDAQ: TLRY), OGI (NASDAQ: OGI), Aphria (NASDAQ: APHA), Sundial (NASDAQ: SNDL), Medmen (OTCMKTS: MMNFF) and Green Thumb Industries (OTCMKTS: GTBIF). 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