Meme stock fever hits ASX: Should you jump on the bandwagon?

Highlights

  • The trend of buying meme stocks in order to make a quick windfall profit has spread to the Australian markets as well.
  • Archer Materials, despite zero sales in FY21, has rallied over 310% since 24 June 2021 on the back of a multifold surge in trading activity.
  • Rather than diving headfirst into the meme stock frenzy, it is wiser to do your own due diligence or consult your financial advisor before investing in any stock.

Earlier this year, everyone witnessed the buying frenzy in meme stocks in the US as new age traders came together to inflate the price of their favorite stocks. This new wave of traders conduct their research online on social media platforms to find the latest hot stocks without paying much heed to their valuations.

Subsequently, a social media-triggered buying spree catapults the price of these shares to exorbitant valuations, enough to be unsustainable. This soon leads to an equally sharper correction (if not more severe), trapping these traders with overvalued stocks in their portfolios.  

This trend is not just limited to the US but has spread to the Australian markets as well. Archer Materials Limited (ASX:AXE) is one such stock that has risen to sky-high prices in a very short span of time and is now facing excessive selling pressure from the top.

3-month comparison chart of AXE (Yellow) & ASX 200 (Purple)

Image Source: Refinitiv; Analysis: Team Kalkine

At the peak of AU$3.08 (on 16 August 2021), the AXE share price is up by over 310% since 24 June 2021. The increased participation has been seen from the volume spikes in AXE share trading on the ASX. On 24 June, the 10-day average volume of AXE shares was around 233K, which surged to 3.57 million by Tuesday, depicting a staggering 1400%+ increase.

Interestingly, this buying interest has been witnessed despite the company ending FY21 in June with zero sales. A total of AU$2.3 million was reported as cash loss, which only consisted of administration cost and staff salaries.  

However, it seems these traders are about to get a taste of reality as the stock might have started its steep correction phase. On Tuesday, the AXE share price nosedived more than 20% on above average volume, showing traders have now started to exit.

Another meme stock that has triggered a massive rally on the back of a sudden buying interest is Dimerix Limited (ASX:DXB). On Monday, the DXB share price opened 70% higher at AU$0.4, after it released its investors presentation. It also announced that it has received firm commitments for a placement of AU$20 million via the issue of 100 million shares at AU$0.2 each.

3-month comparison chart of DXB (Yellow) & ASX 200 (Purple)

Image Source: Refinitiv; Analysis: Team Kalkine

Monday’s opening price of AU$0.4 straight away doubled investors’ money who were in for the share placement, which could point out to suspicious trading activity. Investors might also have taken a note of this and started exiting their positions, leaving a 40% gain at the closing. Today, the DXB share price is further down by 8.9% to AU$0.305 as investors are trying to cut bait.       

Related article: How Does A Meme Stock Work?

Bottom line

There is no harm in buying stocks that are rising up in value, however, jumping on the bandwagon while ignoring the valuations or the business model completely could be disastrous for the portfolio. As reality hits these stocks, their exorbitant valuations start their downward slide fairly quickly, leading to a sharp correction, making it difficult to exit. Therefore, it is always recommended to do your own due diligence or consult your financial advisor before taking the plunge.

Read More: Elon Musk’s Dogecoin Preference Backed By “Dogs and Memes”

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