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Graham Griffin
Graham Griffin
Articles (169) 

GameStop Sees Another Surge Well Above $100 Per Share

High levels of volatility cause multiple halts in trading

January 25, 2021 | About:

Shares of GameStop Corp. (NYSE:GME) rallied once again on Jan. 25, peaking over $150 per share during morning trading despite a double downgrade by Telsey Advisory Group. The stock has seen a massive rise in January thanks to high levels of purchases from short sellers.

GameStop is a U.S. multichannel video game, consumer electronics and services retailer. The company operates across Europe, Canada, Australia and the United States. GameStop sells new and second-hand video game hardware, physical and digital video game software and video game accessories, mainly through GameStop, EB Games and Micromania stores and international e-commerce sites. The company has two main business segments: video game brands and technology brands.

The gaming retailer initially saw a jump in share price on Jan. 11 after information was released that Chewy (NYSE:CHWY) co-founder and activist investor Ryan Cohen would be joining GameStop's board of directors. Shortly after the news was released the stock began to rise in price as investors hoped that Cohen would influence a new strategy for the retailer.

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As the stock price rose almost 50% over a three day period, hedge funds jumped to buy back shares to cut losses. To a lesser extent, retail investors have also shown interest in the company based upon forecasts for the new gaming cycle according to Telsey Advisory Group analyst Joseph Feldman.

As both parties have continually made purchases, the price has been driven up significantly over a short period of time. With trades coming in at such a high volume and price changes occurring simultaneously, trades have been halted multiple times due to volatility.

As of Jan. 25, the stock settled at $79.89 per share with a market cap of $5.52 billion. The GF Value Line shows the stock trading, unsurprisingly, at significantly overvalued levels.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 1 out of 10. There are currently two severe warning signs issued for declining gross margin percentage and declining revenue per share. The company is expected to report losses for 2020, as reflected by a weighted average cost of capital that far exceeds the negative return on invested capital.

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In the third quarter of 2020, there were several new guru buys in GameStop, including John Hussman (Trades, Portfolio), Jim Simons (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).

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Disclosure: Author owns no stocks mentioned.

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Rating: 3.0/5 (1 vote)

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Comments

Praveen Chawla
Praveen Chawla premium member - 1 month ago

Revenge of the Robin-Hooders

This stock was given up for dead last year and hedge funds bet heavily shorted the stock. On December 31st, Morningstar data showed that over 260% of the float of the stock was shorted. Shorting more than the float means that some market players were using a combination of naked put options and naked shorting (i.e., shorting without borrowing shares). ( Naked shorting is an illegal practice of short selling shares that have not been determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed before they sell it short. Due to various loopholes in the rules, and discrepancies between paper and electronic trading systems, naked shorting continues to happen).

26Jan20211159331611683973

The run-up can be explained by a combination of short-covering and options trading. Retail investors fueled by chatter on stock boards like Reddit, "flash mob-ed" the hedge funds shorting the stock. When the hedge funds rushed to cover their short positions, a massive short squeeze occurred. When the dust settles it will become apparent that a massive transfer of wealth has occurred between the Robin-Hooders and the Hedgies. Looks like Round 2 has gone to the former. Now we await Round-3.

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