By February 17, 2021 Cfs at verity credit union
If you’ve been watching the news, using social media or... breathing, you’ve probably heard about this situation around the stock of GameStop (GME). I’ve been asked about it a lot, including by my daughter who lives in Barcelona, so I thought I should address what’s going on.
GameStop is a small electronics retailer that depends on brick and mortar stores for sales. They sell video games, consumer electronics and gaming merchandise. As video games migrate to streaming services and subscription models, GameStop seems to be a dying business. Many have called it the Blockbuster Video of gaming.
There are many companies that seem to be in this type of challenging situation. Changing industries, tough competition, etc. Companies like AMC Entertainment (theaters significantly shut down for who knows how long), Blackberry Ltd. (who carries a Blackberry these days?), and GameStop. Because of this, there are some large hedge funds who will bet against them by “shorting” their stock. This means they sell the stock without owning it, and hope the price goes down. Then they buy it back at the lower price to close the transaction and pocket the difference. If you think a stock will go up, you buy it first and sell it at the higher price. Shorting a stock is the opposite of this: sell first, buy back later.
In the case of GameStop, this was a very heavily shorted stock. In fact, the number of shares that were sold short (i.e. by people who did not own them) was 130% of the actual number of shares outstanding*. So a group on Reddit starts talking about this and devise a plan to start buying GameStop stock. By doing this, they hope to push the price up. If they push the price up high enough, the short sellers may start to buy the stock back to close their positions. This could cause the price to go even higher, which would cause more short sellers to buy back the stock. Which could cause the price to go even higher, etc., etc., etc. This is called a “short squeeze”. The short sellers are buying the shares to close their positions and simultaneously pushing the price up. Meanwhile, the Reddit people are making money because the shares they bought to cause this are going up.
Here’s the play-by-play: For the bulk of last year, GME traded in the single digits and ended the year at $18.84/share. On January 25th it closed at $76.79. Two days later it ended the day at a closing high of $347.51 up nearly $200 on the day. The next day it hit an intraday high of $483 before closing at $193.60 that same day. And today (2/9/2021), GME closed at $50.31**.
It would seem that the strategy worked. As the price moved to nose bleed levels, it could be surmised that the Redditers, et al made money all the way up. And that the short sellers lost as they had to buy at higher prices than they had originally sold. And I’m sure that this did happen. To a certain extent. However, it’s never that simple. I would submit that not every investor who made money was a small, retail investor and not everyone who lost money was a rich, hedge fund manager.
There was so much money moving in and out of GameStop that there had to be some institutional investors buying along with the Redditers. The sheer number of shares traded on a daily basis points to more than just retail money. And, while GameStop was the most egregious of the highly shorted stocks, there were several other companies in similar situations. AMC Entertainment, Blackberry and Koss Corporation to name a few. In the case of Koss (a headphone manufacturer) the stock was trading under $3/share as recently as January 15, 2021. On the 28th, it hit a high of $127.45. Today (2/9/2021) it closed at $17.92**. Meanwhile, in the midst of all this, Koss Corp “insiders” (family and directors) sold over $50 million in stock**. This is more than the whole company was worth at the end of last year.
As with most instances of mania on Wall Street, there are bound to be many stories of despair. Ordinary people who get caught up in the moment, try to make a quick buck, and end up losing their shirts. And this time was no exception. We may never know the extent of these losses, but the reports are already coming in^^. Individual investors who were late to the game may have purchased after the stocks went up and either held or sold after they went back down.
So did David slay Goliath? Perhaps. But before you tout the power of social media to take down the rich, fat cats, bear in mind the collateral damage. And the fact that the largest shareholders of these stocks pre-short squeeze were institutional investors*** (hedge funds, mutual funds, pension funds, etc.) or company insiders. When the short sellers were looking for shares to buy, who do you think sold to them at the elevated prices? Hopefully this will serve as a cautionary tale to know what is happening when you invest and to understand the risks involved in your portfolio.
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