Is it game over for Gamestop activists?
Gamestop shares were worth just $90 on Wednesday morning, compared to a peak of $469 last Thursday (28 January). A year ago, Gamestop was valued at just $3.25 a share.
The struggling US games retailer benefitted from a surge in interest after armchair investors on social media site Reddit grouped together to take on hedge funds aiming to “short” the shares.
The “short squeeze” inflicted heavy losses on hedge funds and other short-sellers who were betting that the share price would fall.
Some hedge funds had borrowed and sold millions of GameStop’s shares. These funds were facing huge losses and had to buy the shares back to stop those losses rising further. But buying the shares back created additional demand, pushing the price up even higher, and the hedge funds involved lost lots of money.
But now the tables appear to have turned with the initial success of the “short squeeze” on Gamestop now in reverse.
A number of other heavily shorted stocks were also targeted by amateur investors. These include AMC Entertainment, Blackberry, Nokia and Bed, Bath & Beyond. But these stocks have all seen their share price fall today.
AMC shares peaked at $19.90 on 27 January but fell to just $6.32 yesterday, before rebounding slightly. Blackberry shares were worth $28.26 a week ago, but just $11.55 today.
Silver has also been caught up in the trading frenzy. It hit an eight-year high of $30 an ounce on Monday, but has now also fallen back.
The fall in GameStop’s share price indicates that the hedge funds betting against it have now closed out their positions.
Richard Flax, chief investment officer at Moneyfarm, said: “The alleged conflict between retail investors and large hedge funds is unusual, and seems to have taken on a more existential perspective – rich vs poor, millennials vs boomers.
“This story will end soon, as the reality of the underlying fundamentals rather than market dynamics eventually drives the valuation of these businesses. It’s often said that stock markets are voting machines in the short-term and weighing machines in the long. We think that will eventually bear out.”
Azamat Sultanov, Co-CEO of Fortu Wealth, said: “Technology has helped to democratise access to the financial markets. Whereas historically, an individual investor would need access to a broker, along with any additional requirements that they may have, the rise of digital brokers such as Robinhood, Trading 212 and EToro have reduced the barriers to entry to a smartphone and bank account.
“While it’s certainly true that there are opportunities for some to find great returns through investing in heavily-shorted companies, there is also the very real risk of inexperienced investors losing large sums. The combination of instant social media information, with these digital brokerships can and has led to swathes of first-time investors jumping on a bandwagon that is propped up by unverified information, with many of these investors overlooking due diligence in the hope of quick gains.
“For many, the investment in GameStop and AMC has become a matter of the heart which may result more holding onto investments that prove untenable. Instead of closing off access to the markets, we instead call for better education. This will allow for more to benefit from engaging in the markets, while preventing against risky trading.”