These 2 Nasdaq Meme Stocks Crashed Back to Earth Thursday

The stock market has seen a lot of violent moves among individual stocks lately, and that’s played a role in the volatility in the Nasdaq Composite (NASDAQINDEX:^IXIC). As of 12:30 p.m. EDT, most major market benchmarks were little changed, but the Nasdaq  was down almost a full percentage point.

Investors are paying a lot of attention to so-called “meme stocks,” especially those in which large institutional investment companies have taken significant short positions. Yet, while short squeezes can lift share prices substantially in the short run, there’s often a shoe that drops and prompts a retreat from those higher spikes. On Thursday, both Bed Bath & Beyond (NASDAQ:BBBY) and PetMed Express (NASDAQ:PETS) suffered exactly that type of reversal in their stocks.

Home sweet home no more

Shares of Bed Bath & Beyond were down more than 25% on Thursday afternoon. The downward move gives back a substantial portion of the home goods retailer’s gains from Wednesday.

Image source: Getty Images.

Nominally, Bed Bath & Beyond’s move higher Wednesday came on the heels of an announcement that it plans to focus more on private-label brands in its inventory. Doing so would potentially capture a greater portion of the profit margin available on the goods it sells, which would be a positive for investors.

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Yet most market participants attributed the lion’s share of those gains to the fact that Bed Bath & Beyond sports a relatively high level of short-sale interest, and retail investors have centered on heavily shorted stocks as having potential for short squeezes and big price gains.

Past episodes of retail investor buying have ended with price spikes in Bed Bath & Beyond proving to be very short lived. The stock is still above where it traded before the latest move higher. But without greater fundamental improvement in its business, Bed Bath & Beyond could have a tough time sustaining its recent outperformance.

PetMed has more bark than bite

Meanwhile, shares of PetMed Express were also sharply lower, falling 26%. The online pharmaceutical provider for pets saw a similar jump on Wednesday, but in this case, it was Wall Street itself that sent the stock going in the other direction.

PetMed also has a massive level of short interest, so it wasn’t surprising to see the stock soar on Wednesday. Moreover, with pet ownership becoming more popular during the pandemic, market participants have seen a lot of promise in PetMed’s underlying business.

However, analysts at Sidoti believe that the stock’s huge gains from Wednesday were greater than the success of the business warranted. Sidoti downgraded PetMed from buy to neutral, citing the potential short squeeze as the only catalyst driving the stock’s recent gains and by implication suggesting the gains could prove fleeting.

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Maintaining a long-term focus

It’s tough for long-term investors to maintain discipline when stocks move violently higher and lower on successive days. Nevertheless, the best approach is to concentrate mostly on the health of a company’s underlying business and to make investment decisions based on what you see in each company’s fundamentals. Both PetMed Express and Bed Bath & Beyond have opportunities and challenges ahead, and it’ll take successful navigation from their respective leadership teams to produce the positive outcomes that shareholders are hoping to see sooner rather than later.

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.

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