Why A Retailer In “Terminal Decline” Has Climbed 750% This Year

Why A Retailer In “Terminal Decline” Has Climbed 750% This Year
Carl Hazeley

about 3 years ago3 mins

Mentioned in story

What’s going on here?

On Friday last week, shares of US video game retailer GameStop shot up 50% – a rise was so rapid that trading was briefly halted. The stock then ended Monday up another 18%, having hit a 150% intraday increase at one point – and on Tuesday rose another 93%. Unsurprisingly, this grabbed many Finimizers’ attention – so here’s the lowdown on what’s been happening and why.

What does this mean?

On Thursday, Citron Research, a high-profile short-selling activist investor (i.e. one whose main goal is to profit from falling share prices) said GameStop’s business was in “terminal decline” – and that it believed its share price would soon halve.

That appears to have ground the gears of retail traders on Reddit forum r/WallStreetBets, where GameStop’s stock has become a firm favorite. They didn’t take kindly to Citron’s public intervention – and encouraged each other to buy up more shares (and GameStop call options) instead.

GameStop’s share price
GameStop’s share price

But there’s another angle to all this: investors’ recent enthusiasm for GameStop’s stock might also have been fueled by hopes of forcing Citron and others betting against the company’s shares to back out of their bets – a.k.a. a “short squeeze”.

🗣 Here’s how it works. To short a stock, an investor borrows shares from an owner and sells them on the stock market, hoping to repurchase them later at a lower price and pocket the difference. But there’s no limit to what that investor might lose if the share price rises instead of falls. Citron will have limits on how much it’s willing to lose betting against GameStop – so if the stock goes high enough, then Citron may be forced to “close out” its bet by buying back the shares it’s due to return before they get any more costly. And even that demand could help push GameStop’s price even higher.

Why should I care?

Historically, retail investors had next to no control over the movements of multi-billion-dollar stock markets. But commission-free trading apps are changing that: more and more individuals are committing their cash to stock markets, growing retail investors’ combined influence – especially over smaller companies like GameStop. It’s worth some $10 billion, compared to the median S&P 500 company market capitalization of around $27 billion. And that’s after the recent price rises.

But with great power comes great responsibility: loud voices on platforms like Reddit can get a bunch of smaller traders to club together and buy up stocks they like – but unless they’re able to find a willing buyer down the line, many will be stuck having overpaid for a not-very-valuable asset.

Assuming Citron had a point about GameStop – its sales were, after all, down 31% in the first nine months of 2020 – investors who’ve pushed its share price up may have “won” in the short term, but if everyone else thinks the $148 shares are worth more like $20, then they’ll eventually face selling at a significant loss.

Still, perhaps you can’t blame people for following the advice of strangers on the internet. Quiver Quantitative’s “WallStreetBets” portfolio, which tracks the performance of the five most-mentioned stocks on the forum in a given week (and which you might remember from an Insight last week), is up 62% over the past year – trouncing the S&P 500’s 15% gain. For what it’s worth, you can see what’s currently buzzy in the forum here

Source: Quiver Quantitative
Source: Quiver Quantitative

So there you are, Finimizers: mystery solved. You’re welcome 😎

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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