'Big Short' Michael Burry Gives Meme-Stocks Investors a Piece of Advice

The legendary investor warn investors backing companies championed by social media that they may see their bets turn sour soon.

The start of 2023 has been filled with roller coaster emotions for meme stock investors. 

They observed a huge rally also dotted with falls before a new rebound. 

The movement concerns a large part of the speculative assets which collapsed last year. Since the start of 2023, the performance of the Meme ETF has been exciting. It's up  30.4% this year.

The recent rallies of meme stocks and other stocks with similar profiles show that socially mobilized investing, even though bruised by last year's losses, is still alive. These investors supporting the meme stocks are most often mobilizing on the Reddit social network.

The main reason behind the great start to the year is due to expectations of a less worrisome macroeconomic scenario for stocks in general. Hopes for a soft landing of the global economy were reinforced earlier this year when inflation appeared to have peaked.

This provides some relief for assets most impacted by a high-interest-rate scenario — especially growth and speculative stocks. 

Bed, Bath & Beyond

Some meme stocks are even experiencing a veritable renaissance despite major problems. This is the case of Bed Bath & Beyond  (BBBY) - Get Free Report for example. The retailer's stock is currently up 3.60% to $2.61 this year. But it had risen to $5.86 on February 6 even as the specter of bankruptcy hangs over the company.

The stock's rallies have come courtesy of retail investors and traders using social media platforms such as Reddit. Mentions of the home-goods retailer's stock rose more than 1,000% on Reddit during January. This popularity resulted in a sudden increase in trading volume. And that resulted in 1.8 million shares changing hands in January, versus 200,000 the previous month.

What has helped make Bed Bath & Beyond so popular is the fact that the stock is among the three most shorted assets in the stock market. Its short interest currently accounts for nearly half of its float. As a result, the company has become the target of short squeezes this year.

A 'short squeeze' is a sudden surge in the price of an asset due to the fact that investors who bet against the asset are forced to purchase it in order to limit their losses. This phenomenon has spread in recent days around the meme stocks that were decimated last year.

But Bed Bath & Beyond's business fundamentals are still bad. In mid-January, the company reported disappointing quarterly results that missed estimates for both earnings per share and revenue.

'It's Time Memesters'

The sales fell by more than a third, compared with the same period last year. Operating losses grew to $225, and the company has only $153 million in cash available.

In an effort to improve its financial picture, Bed Bath & Beyond has closed about 150 stores and laid off a good portion of its staff.

Legendary investor Michael Burry thinks this can't last. He just warned meme-stock  investors that their luck may turn into a nightmare very quickly.

"It's time memesters look up what a death spiral convertible is," the investor urged on Twitter on Feb. 9.

"Memesters" refers to meme stock investors.

'Death spiral convertible' is a financing instrument used by companies that are in such bad shape, that there is no other way to get financing, according to the Nasdaq. It's similar to a convertible bond, but convertible at a discount to the share price when it's issued and for a fixed dollar amount rather than a specific number of shares. 

"The further the stock falls, the more shares you get," says Nasdaq.

Basically death spiral convertible also known as toxic convertible increases the number of shares of the company using them in the market, and inevitably leads to a steep drop in the price of shares.