• Meme stocks have returned in recent days, according to market strategist Steve Sosnick.

• The sharp rallies in stocks like Reddit and Truth Media highlight the YOLO-esque trading activity.

• Use the three criteria detailed below to identify the next meme stock, according to Sosnick.

The meme-stock sequel has arrived as heightened trading activity in individual stocks leads to massive gains.

Shares of Reddit surged as much as 120% following its IPO last week, which is ironic given that it is home to the popular Wallstreetbets forum.

Wallstreetbets "was the incubator for the meme-stock phenomenon in the first place, so it is unsurprising that its own stock would exhibit that type of behavior once it became listed," Interactive Brokers' chief market strategist Steve Sosnick said in a note on Wednesday.

Meanwhile, Donald Trump's Truth Media stock experienced a one-day gain of as much as 59% after it went public via a SPAC on Wednesday. That trading activity suggests to Sosnick that meme stocks have returned "with a vengeance."

Those aren't the only stocks that have surged in recent days. Sosnick highlighted that "the 'OG' meme stock" GameStop, bitcoin, and MicroStrategy have all soared recently despite little-to-no fundamental news.

"We've been in a highly momentum-driven market environment, and it is clear that some of that momentum has morphed into wild enthusiasm for a range of highly speculative investments," Sosnick said.

The thing about momentum in the stock market is that it can last a lot longer than some may think. And it's starting to spill over into other areas of the market, according to Sosnick.

Accordingly, Sonsick offered three criteria that investors should consider when searching for the next potential meme stock.

1. "Quasi-religious fervor"

"A key element that fueled the original meme stock rally was an 'us versus them' mentality that was fermented on social media," Sosnick said.

This type of enthusiasm can be found in some pockets of the cryptocurrency world, as well as in Truth Media given the political nature of former President Donald Trump.

"I have always believed that the company's most devoted investors viewed it as a call option on the MAGA movement, which of course has its own highly devoted proponents.  It is hardly unreasonable to expect that many of those devotees would vote for their preferred candidate with their wallets," Sosnick said.

2. "Disregard for fundamentals"

"If one's investment decisions are based primarily upon emotions, then it is hardly a surprise that standard valuation metrics will be cast aside," Sosnick said.

Investors who fervently believe in a company or story or person don't necessarily care if the company is profitable or not. That leads to irrational investing behavior.

"They're not doing detailed calculations about the discounted future cash flows of their favorite stocks," Sosnick said.

For example, Truth Media has a multi-billion dollar valuation yet it generated just $5 million in revenue during the first nine months of 2023.

"Its situation is not unique. Even though GME is far from its all-time highs, its valuation remains stratospheric. It sports a P/E above 600 along with a triple-digit forward P/E. None of these can be remotely considered value stocks, and few can be honestly considered demonstrable growth stocks. Thus, the unique 'meme-stock' classification," Sosnick said.

3. "High short interest"

Because sky-high valuations that are not rooted in fundamental value attract short-sellers, it's no wonder that a potential meme-stock would have a significant group of investors betting against the company.

"Stratospheric valuations attract short sellers. Those investors are indeed concerned with valuation metrics and borrow shares to sell with the hope of selling high and buying low," Sosnick said. "As we saw in 2021, this can be a powerful catalyst for a meme-stock rally.

Read the original article on Business Insider