Here's how companies like Kohl's and Krispy Kreme got caught in the meme stock frenzy

Reminiscent of the GameStop and AMC rallies of 2021, stocks like Kohl's, GoPro and Krispy Kreme saw volatile trading in late July.

It's the latest class of meme stocks, which are companies that experience sharp swings in their share prices that are not based on their underlying fundamentals.

Meme stocks are typically cheap. Kohl's share price, for example, is down around 40% over the past year.

While Kohl's has seen its sales and profitability decline in recent years, it's still a widely recognized company.

“It's a household name, and it's much easier to get people interested and excited about manipulating a household name than it is with a relatively unknown stock,” said GlobalData managing director Neil Saunders. “I think that recognition is quite important in allowing almost the meme or the narrative to spread, and for more people to jump on the bandwagon.”

Meme stocks are also often heavily shorted, meaning investors have bet on them to go down.

About 47% of Kohl's, 28% of Krispy Kreme and 9% of GoPro's outstanding shares are sold short, according to FactSet.

When shorting a stock, investors borrow shares from a broker and sell them on the open market. The investor is hoping to buy back that share when the price goes down and keep the profit from the initial sale.

In the case of meme stocks, hoards of traders rally together on forums, like Reddit, to drive the share price up. When the price of a shorted stock rises instead of falling, those investors who shorted the stock will also buy back their shares to minimize further losses.

“What you end up [with] is this kind of really intense feedback loop that pushes and inflates the share price. And obviously people involved in this, doing the buying and the selling, can make money off the back of these quite wild swings,” Saunders said.

Watch the video to learn more about how companies like Kohl's become a meme stock.