GameStop (GME) shares went through a massive short squeeze, spiking more than 130% on Monday and prompting trading halts before dipping briefly into negative territory. Shares of the video game retailer closed up 18% at $76.79 each.
The stock’s volatility was a sight never before seen by more than one Wall Street veteran.
“I have seen a lot in 40 years in the business, but some of the things we are seeing lately would have been considered wild in the year 2000,” money manager Bill Smead told Yahoo Finance Live on Monday.
“If you want to gamble, go to the casino. This is not what the markets are for,” Loop Capital analyst Anthony Chukumba warned retail investors, some of whom have been boasting about their winnings.
Last week, shares spiked more than 100% as a clash between short-sellers and Reddit WallStreetBets (WSB) caused a massive short squeeze on the stock. A short squeeze forces those who bet against the shares to buy in order to forestall bigger losses, sending the stock price much higher.
‘The first line of troops goes down in a rain of musket fire ...’
What’s happening with GameStop is a “unique situation on the short-side” according to Ihor Dusaniwsky of S3 Partners.
The data company has been seeing a short-squeeze on older shorts who have incurred massive mark-to-market losses on their positions. However new shorts coming in use “any stock borrows that become available to initiate new short positions in hopes of an eventual pullback from this stratospheric stock price move.”
“Much like the Revolutionary War, the first line of troops goes down in a rain of musket fire but is replaced by the troops next in line,” said Dusaniwsky.
“Year-to-date net-of-financing mark-to-market losses are -$6.12 billion, which includes a loss of -$2.79 billion on today’s +60% intraday move. This is after shorts were down -$1.58 billion in mark-to-market losses on Friday” he added.
On Monday the stock was stripped of its only Outperform rating by Telsey Advisory Group citing a disconnect between fundamentals and valuation. Analyst Joseph Feldman double-downgraded the stock to Underperform with a price target of $33 — currently the highest street price prediction.
“In our view, GameStop's share price increase of ~333% in the past three months—and a tenfold increase of ~970% since our upgrade to Outperform on September 14, 2020 at $6.09—far exceeds our high fundamental expectations and projected multi-year benefits of the new gaming cycle,” wrote Feldman.
The lowest price target on the stock is $3.50 by Credit Suisse analyst Seth Sigman. GameStop shares now have 4 Holds and 4 Sell ratings.
‘A perpetual short squeeze machine’
On Friday veteran trader Brian Shannon warned short-sellers against trying go against a stock like GameStop when it’s up too much.
“They’ll try to go in and short the stock, and then the stock rallies 10%, and they cover. And then what happens is it becomes a perpetual short squeeze machine,” Shannon told Yahoo Finance.
“If you look at short interest numbers, they’re rotating extremely fast right now. It’s a game of musical chairs. If you’re involved in it, if you’re looking to short it, wait for it to break down. There’s no such thing as up too much,” said Shannon.
The story behind last week’s massive spike involves a response to short seller Citron Research’s recent prediction that shares of the video game retailer will drop to $20 a piece. Last Tuesday Citron’s managing partner Andrew Left announced he would list five reasons why the shares will plunge.
Reddit users dubbed WallStreetBets (WSB), a forum on the message board platform, pushed back on Left’s call and apparently helped create a massive short squeeze on the stock.
“I’ve never seen such an exchange of ideas of people so angry about someone joining the other side of a trade,” said Left in a YouTube clip last Thursday. He went on to list the reasons why he thinks the stock will go down to $20/share.
The reaction from Reddit users and other retail investors sent the stock up more than 50% on Friday as they celebrated the stock’s squeeze to record highs.
Also on Friday, Left said he would stop commenting on the stock.
“We are investors who put safety and family first, and when we believe this has been compromised, it is our duty to walk away from a stock,” Left wrote in a letter posted on Twitter.
The stock had been trending higher prior to last week. On January 12, shares were trading around $20/each after GameStop announced Ryan Cohen was joining the board of directors. Cohen is an activist investor and co-founder of pet retailer Chewy Inc (CHWY).
In July of 2020, the stock was trading at around $4 a share.
Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre