What happened
Meme stocks took a big hit during another weak trading day on Friday. Three volatile stocks that have become popular with many investors, GameStop (GME 2.12%), AMC Entertainment (AMC -0.89%), and Vinco Ventures (BBIG 33.33%) fell between 3% and 14% by 11:15 a.m. EDT, while the broader market was down roughly 1%.
There wasn't any significant news out of the companies, but shares are down over the last few trading days as investors have turned away from riskier stocks.
Image source: Getty Images.
So what
In Vinco Ventures' case, the digital-content specialist is still up sharply so far in 2022, in part because investors are looking forward to the company's planned spin-off of a division called Cryptyde, which focuses on cryptocurrency assets. Management had planned for the separation to occur early in 2022.
Investors are also excited about its Lomotif brand, which is gaining traction on social media platforms. Shares fell on Friday after running higher early in the week.
AMC Entertainment stock, meanwhile, is down over 35% in the last three weeks after having soared through most of 2021. There's no shortage of reasons to worry about the prospects for this movie-theater giant, including the debt costs associated with rising interest rates. The stock was ripe for a pullback, too, after gaining over 1,000% in the past year.
As for GameStop, its prospects have become dimmer over the last few quarters, even though the stock is still trouncing the market over the past full year. The retailer is closing locations in hopes of creating a smaller, more-efficient business. But recent acquisitions in the industry confirm that video game revenue will soon be almost all digitally based, and mainly flowing to content and platform owners like Microsoft and Sony.
Now what
Friday's decline in these stocks is a good reminder that the volatility that made many meme stocks attractive to investors in 2021 applies just as directly to downward-price motion. That's true when wider investment sentiment turns negative, too, as it has through the first few weeks of 2022.
That's why investors should only consider owning highly volatile stocks as a small portion of their overall portfolio, and they should be willing to endure unpredictable downturns that may -- or may not -- be quickly erased.
In that scenario, it makes even more sense to focus on the strengths of a business rather than its short-term stock-price swing potential. By that measure, GameStop, Vinco Ventures, and AMC Entertainment each has long-term earnings challenges that could pressure investor returns. Those risks are amplified by the fact that these stocks have had sharp rallies that didn't necessarily move in step with improving business fundamentals.
Sure, it's likely that the stocks will recover the ground they lost recently once investor sentiment turns more positive again. But most investors will sleep better at night by holding a diverse portfolio of companies that have demonstrated their growth and earnings strengths over several years. These stocks tend to provide an income cushion, too, which is valuable during those inevitable market downturns.
