A meme stock revival is crushing short-sellers and is much worse than such events in the past, according to Aristides Capital founder Claire Brown — who was previously known as Chris and recently changed her name and gender.
“I don’t think I’ve ever seen anything like this,” Brown said in a year-end letter to Aristides investors. A rally in what she called “highly retail-loved garbage names” caused Aristides’ flagship fund to lose about 4.66 percent in December, with one of the biggest losers being a short on Tesla. Still, the fund managed a 11.74 percent gain for the year.
Aristides is known as a savvy short-seller but is also a fundamental long investor that engages in arbitrage, macro, and quant strategies and has not had a down year since launching in August 2008. Since then, Aristides has an annualized return of 15.41 percent.
Brown cited the evidence of a low quality rally in the Goldman Sachs High Retail Sentiment basket, a composite of the stocks most frequently mentioned on r/WallStreetBets, which rose 41 percent from September 6 to the end of December.
“The securities tend to be even more speculative than ‘regular’ highly shorted stocks, which are often real businesses that have significant challenges rather than outright ‘meme’ stocks with no fundamental support whatsoever,” she wrote. “The rally . . . was brutally intense in December . . . being pushed relentlessly higher by retail traders.”
Brown noted that the firm had avoided the January 2021 GameStop meme stock rally, which it initially attributed to superior risk management.
“January 2021 was optically a much larger, more absurd event, and we lost far less money so we must have been doing something right,” she explained. “After this month, I’m no longer certain that is the right narrative. It’s quite possible that . . . last month . . . happened directly to the kinds of stocks we tend to short, whereas January 2021 really didn’t.”
Brown said she also had a “sad realization” that so-called once-in-a-generation “volatility events are definitely not a once-in-a-generation freak occurrence. If a thing happens in 1999 and 2020 and 2021 and 2024, it’s more like a recurring climactic event, a shitco El Niño.”
As a result, she said, “the number of companies that are virtually certain to be worthless but [are] trading at multibillion-dollar valuations is the highest it’s been since 2021, and in certain sectors (which we intentionally choose not to mention this month), the froth is beyond even 2021 levels.” These stocks have “90 to 100 percent free-float ratios” and trade at 300 percent of their entire market cap each week, Brown added.
Today’s dynamics differ from the dot-com bubble era in one important way, she noted. At that time, “companies were spending a lot of money to market, and though the cost of acquiring a customer may have been impossibly high, the margin profile doubtful, and the growth prospects overestimated, at least the thing that propelled a stock was somewhat related to its underlying business prospects.”
But now “it is not hype around the business prospects that is the primary driver of a stock, but rather hype around the stock itself,” Brown pointed out. “I really don’t think anything matters to the folks buying these stocks right now, and nothing will matter until something happens that causes people to take losses, at which point leverage (via ETFs, margin loans, zero-day options, and more) will rapidly cause pain.”
In at least one aspect, today’s market is similar to that of the dot-com era. “It’s not entirely surprising that we have an era of speculation,” Brown said. “Artificial intelligence is a transformative new technology, and there’s a lot of capital expenditure being thrown at it — not unlike with the internet in 1999.”
On a personal note, Brown told her investors that she had changed her name and gender “before any potential policy changes which have been threatened early in the Trump administration.” She began her transformation (initially to nonbinary status) several years ago and has long been a strong supporter of trans rights, as Institutional Investor previously reported.