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TheStreet Investigates: How The Market Weeds Out Online Noise for The Next Meme Star

A large number of new products are now offering to track online trends and catch the white-hot phenomenon before everyone else.

After seeing the astronomical rise of stocks like GameStop ( (GME) - Get Free Report) and AMC (AMC), many companies and investors are touting products that can help them find the next big meme stock.

A meme stock, or a stock that jumps in value not because of the company's success but the online hype around it, often begin as a set of keywords that appear alongside the company online. 

Along with obvious words like "going higher" and "invest," a string of dollar signs ($$$) or thumbs up are being used by some to gauge a company's growth potential.

Jaime Rogozinski, who founded Reddit's WallStreetBets in 2012, has been tracking companies that are about to soar in value long before "meme stock" was a term. 

But the difference these days, he told TheStreet in a phone interview, is the number of investors who are not simply monitoring for solid but using social media to turn certain companies into success stories.

"There have always been variations of the same approach of rallying around or focusing on a particular stock," he said. "[...] But now, we have the additional conversation piece of 'let's see if we can increase the odds of our own bet.' While mean stocks were previously viewed as a spectator sport, they are now [turning into] a participant one."

GameStop is the classic example of a company whose success was "created" online. 

GME shares rose by 831% and the video game producer amassed over $1.7 billion in cash after an initial post of a $53,000 investment by Reddit user Roaring Kitty started garnering interest from other investors and snowballed.

As a result, a large number of new products are now offering to track online trends and catch the same phenomenon before everyone else. 

James Kardatzke co-founded alternative data platform Quiver with his twin brother, Chris, out of Wisconsin in 2019. 

The company scrapes stock information not found in obvious places.

Along with tracking the comment section on WallStreetBets, the Kardatzkes look at tickers and the overall sentiment around them in various subreddits, Twitter, and Facebook channels before aggregating it into easily-digestible charts.

"A lot of people want to take a more quantitative approach to just manually going into WallStreetBets, reading around a little bit and drawing their own conclusions, about what's being talked about," Kardatzke said. "They actually want to see the hard data on what's going on in that community,"

The number of Quiver users has doubled to 200,000 in the last two months as the company plans to raise another fund of capital at the end of this year. 

Swiss-based Sentifi, which buys data from Reddit and Twitter to gauge sentiment around stocks, has also seen a large increase in client volume after seeing the success of companies like AMC, a movie theater chain whose shares grew by 1,500% after investors dubbed it a meme in mid-2020.

"Sentifi ingests over 500M+ tweets, forums (e.g.Reddit), news and blogs as it is published each day, mining for investment signals in that data set," co-founder and CEO Marina Goche told TheStreet. "We specialize in detecting unexpected momentum shifts (when sentiment and attention for assets are above normal levels)."

Moez Kassam, chief investment officer at Anson Funds in Toronto, said that their firm built an algorithm after seeing Robinhood ( (HOOD) - Get Free Report) stock skyrocket in the days after the company went public but found that it detected a high number of false positives. 

Because for every GameStop and AMC out there, there are bots who are posting hundreds of tweets around a company without any effect.

"We do some of the work out algorithmically but what we found was that we had a lot of false positives," Kassam told TheStreet in a phone interview. "We had to refine the system to [also] do manual work of watching sentiment move and following Stocktwits and Swaggy Stocks."

As a result, many would-be investors who are relying solely on an algorithm to tip them off to the next big company may end up disappointed. 

Even putting aside the issue of bots and online noise, there are plenty of online investors who will try to turn a company into a meme stock and fail due to a variety of factors. 

The lack of a thorough understanding of the market, other investors catching on or simply new forces coming into play or different market conditions. 

While algorithms will detect the hype, these details may be lost during the crucial moments when decisions on whether to invest or not are made.

"The assumption that a lot of people buying stock means that it's going to go up is an incorrect assumption," Rogozinski said. 

"GameStop [resulted from] an insanely sophisticated, surgical-level understanding of the market. Many of the techniques [may no longer work] as market participants wise up because there were a lot of people that lost money," Rogozinski said. "But there is also a lot of potential to profit from these types of hypes regardless of what actually happens to the company."