May 15, 2024 at 5:00 am ET

Keith Gill is the trader associated with the ‘Roaring Kitty’ X account, which has sparked another rally in ‘meme’ stocks. Photo: Uncredited

The question everybody on Wall Street is asking this week: How is GameStop GME -18.87%decrease; red down pointing triangle suddenly a big thing again? However, the more interesting question might be: Why was it still kind of a thing last week?

On Tuesday, shares in videogame retailer GameStop rose 60% to $49 a piece, having already gained 74% Monday. Those of AMC Entertainment were up 135% on the week at Tuesday’s close.

This new rally was triggered by X user “Roaring Kitty,” who had been inactive for almost two years before posting a drawing of a man leaning forward on a chair. The account is associated with Keith Gill, a former financial consultant who first brought attention to GameStop two years ago with a series of videos analyzing its untapped potential. Users on Reddit organized to prop up this and other stocks that were unloved by Wall Street in an attempt to make hedge funds’ short bets go awry.

To be sure, the mania is unlikely to go as far this time around: According to Vanda Research, $16 million flowed into GameStop on Monday, compared with a peak daily inflow of $88 million on Jan. 27, 2021. “Meme stocks” are linked to the specific zeitgeist of 2021, when people were bored at home because of the Covid-19 lockdowns and suddenly received a bunch of stimulus checks from the government. Hedge funds have presumably become more cautious since, following the massive losses suffered by Gabe Plotkin’s now-defunct Melvin Capital.

Still, it is remarkable that, before this week’s surge, GameStop was still worth around $15 a share. It might not seem like much compared with the split-adjusted $81 it reached in 2021, but it was 10 times its price before the pandemic and still amounted to an insane valuation of 700 times expected earnings last week. Now it is 1,910 times.

There are two ways to think about this. One is the “anchoring” effect popularized by the late Nobel laureate Daniel Kahneman: When it comes to estimating an uncertain quantity, people often take an arbitrary one as a reference. Valuing stocks certainly qualifies as anyone’s guess.

A well-cited 2012 paper by Ling Cen, Gilles Hilary and K.C. John Wei, for example, found that analysts tend to use an industry’s median earnings forecast as an anchor for making estimates about specific companies. As a result, they end up being too optimistic about low-earning firms and too pessimistic about high-earning ones.

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This doesn’t mean that stocks with a ludicrous valuation won’t fall. It just means that GameStop’s recent $81 peak has been acting as a reference point for two years.

But here is another thought that Wall Street veterans might need to consider: Perhaps Roaring Kitty is now part of a select cadre of elite active investors so highly regarded that whatever targets they choose tend to trade at higher valuations. This is sometimes known as the “Einhorn effect”: Whenever Greenlight Capital founder David Einhorn bet for or against a stock, his views had a persistent impact on its price. The legendary Warren Buffett appears to have a similar influence.

Often, companies use this sudden drop in their cost of capital to issue shares and improve their operations, which creates a positive feedback loop. GameStop and AMC both did it, staving off financial distress but not underpinning a turnaround.

Nevertheless, the clearing price of these shares might have remained so high because buyers and sellers knew that Roaring Kitty could return and once again tap the pool of Reddit equity buyers. After all, membership in the Reddit forum r/WallStreetBets has kept steadily rising since its explosion in popularity in 2021, according to analytics page SocialRise, even when meme stocks were in the doldrums.

Since Monday, Roaring Kitty has been posting a barrage of memes and clips from movies, including one featuring Marvel supervillain Thanos. With the amateur trading subculture as strong as ever, these cryptic messages may well play the role of the letters that Buffett sends annually to the shareholders of Berkshire Hathaway, which are analyzed and parsed for every bit of investment wisdom.

Of course, Roaring Kitty’s fame is unlikely to have Buffett’s staying power, and might instead go the way of many online trends, such as planking and the ice-bucket challenge. Likewise, meme buyers’ targets won’t remain the same over time. But the point is that so-called degen traders are an increasingly powerful constituency that is waiting on the sidelines, ready to channel millions of dollars of contributions into a narrow set of stocks. Any new influencer-entrepreneur could easily mobilize it with a few well-placed memes.

The Reddit premium on certain valuations may be here to stay.

Write to Jon Sindreu at jon.sindreu@wsj.com