What Is a Meme Stock? Workhorse May Be the Newest One.


Short interest on Workhorse stock is far higher than average for companies in the Russell 200 index of small-cap stocks.

Shares of Workhorse are surging after big gains Wednesday in a sign that the electric-van maker is becoming a meme stock. But what is a meme stock, anyway?

Workhorse shares rose almost 20% Wednesday and were up another 37% in early trading Thursday, briefly breaking $17 a share. The S&P 500 and Dow Jones Industrial Average, for comparison, were down 0.5% and 0.3%, respectively.

There isn't much news to pin the gains on. One of the more recent research reports mentioning the company came in late May from Cowen analyst Jeffery Osborne. A wrapup of his overall coverage, it pointed out that Workhorse had a high short-interest ratio, which compares the number of shares borrowed and sold short by bearish investors betting on price declines with the total available for trading.

The ratio for Workhorse was 43% as of Thursday. That's very high. The average short-interest ratio for stocks in the Russell 2000 small-capitalization index is about 7%.

A high short-interest ratio usually means something is going wrong at a company. In this case, Workhorse lost its bid to supply the U.S. Post Office with electric delivery vans.

But high short interest also raises the possibility of a short squeeze. That is when stock in a heavily shorted company rises, creating losses for short sellers and a rush to buy back borrowed stock all at once, feeding additional price gains.

High short interest is a feature of most meme stocks. But meme stocks are more than short-squeeze candidates. There are a few other features: rising stock options volume and, of course, showing up in social-media posts with a mix of various emojis, jargon such as HODL (a misspelled hold, or short for hold on for dear life,) and price targets that aren't associated with any Wall Street or fundamental research.

Options trading volume can be an important factor in meme stocks. Options cost a fraction of the price of the underlying stock, giving investors a way to magnify their exposure. Of course, if a stock price never reaches the level embedded in a call option, which gives the holder the right to buy a stock at a fixed price, then the owner loses their money. The option contract expires worthless.

Workhorse's call-option volume is up more than 330% over the past five days.

Now that it is a meme stock, where can Workhorse go? That is tough for investors to predict. Investors and traders do fundamentally different things. Investors are concerned with earnings, cash flow, and business strategy. Traders are concerned with stock-price momentum and technical charts.

For now, Workhorse stock is in the hands of traders. Don't expect fundamentals to matter much.