Election Momentum Is Pushing DWAC Stock Up. Here’s Why It Still Isn’t a Buy.

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Former President Donald Trump isn’t having a good week. Days ago, a D.C. Circuit Court of Appeals denied Trump’s claim that he is immune from prosecution for crimes against the United States related to his efforts to overturn the 2020 election. The three-judge panel handed down a unanimous 57-page decision which Politico describes as a “major win for special counsel Jack Smith.” Indeed, even with Trump’s recent political victories in Iowa, New Hampshire and Nevada, his legal troubles aren’t improving. But as Trump moves closer to securing the Republican nomination, Digital World Acquisition (NASDAQ:DWAC) stock is also enjoying some much-needed momentum.

After spending months trending downward, the blank-check partner of Trump Media & Technology Group (TMTG) is finally reversing course. We haven’t seen this type of price action from DWAC stock in quite a while — really, not since Trump first announced the merger in October 2021. But for all the growth shares have demonstrated recently, this Trump trade is still a stock to avoid. Here’s why.

Is DWAC Stock the Next Meme Stock?

True, DWAC stock has surged significantly over the past month, rising more than 150%. At first glance, the situation probably looks ideal for investors. After all, Trump is on the fast track to securing the Republican nomination. That will mean a lot of attention for him and, by extension, TMTG and Truth Social. Right?

Not so fast. When a stock rises by so much so quickly on hype, investors should always approach with caution. Quick growth surges are often unsustainable and that certainly seems to be the case here.

Yesterday, Digital World announced that it is close to securing a new funding deal worth $50 million. At first, that sounds like great news. However, DWAC stock has been falling all day. As of this writing, shares are down more than 5%.

The fact that DWAC stock is proving unable to rise in the face of this much more tangible news suggests that the rest of its recent momentum is simply the meme stock treatment. If you’re not convinced of that, consider the fact that mentions of DWAC across social media have been surging.

If DWAC does end up being the subject of meme attention again, investors should be wary. As InvestorPlace’s Eddie Pan notes, the groupthink mentality that has powered meme stocks before has caused a lot of investors to lose money from betting on unstable companies.

The Worst Is Yet to Come

Meme stock or not, investors should be even more concerned about the many problems facing Digital World Acquisition. Trump’s bid for the RNC nomination may be continuing, but so is the U.S. Securities and Exchange Commission (SEC) probe that has led to people connected to the company being charged with insider trading.

As The Washington Post reports, the investigation isn’t over yet. That means it could easily reveal more illicit activity, which could in turn hurt DWAC stock. These circumstances are hardly encouraging, especially as the company’s history already includes SEC subpoenas and merger delays.

In August 2023, I wrote that Trump’s ongoing legal troubles would spell the end for DWAC stock. I stand by that prediction, even as shares enjoy a temporary boost. When a company depends on someone as unstable as Trump, there is simply too much that can go wrong at any given time. While focus on Trump will remain high as the election draws near, this stock will more than likely fail to sustain its momentum.

On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Samuel O’Brient is a Reporter for InvestorPlace, where his work focuses primarily on financial markets, global economic trends, and public policy. O’Brient writes a weekly column on recent political news that investors should be following.

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