GameStop surge hits extremes as amateurs buy stock
Tesla chief Elon Musk's tweet fans rally
New York — GameStop’s breathtaking ascent showed no sign of slowing Wednesday, with bullish day traders keeping the upper hand over short sellers who started to capitulate.
The shares rose 157% to a session-high of $380 shortly after 11am in New York, leading to at least two volatility halts. The advance means the video-game retailer’s market value has risen more than 20 times in January alone to about $26bn, making GameStop bigger than more than a third of the companies in the S&P 500 Index.
The meteoric rally has left short sellers counting the cost in a battle with day traders who have taken to the Reddit social media platform to encourage others to follow their lead. Melvin Capital closed out its short position, while Citron Capital’s Andrew Left said the firm covered the majority of its short in “the $90’s at a loss of 100%”.
“It does feel like rationality and fundamentals are just kind of dead,” J Capital Research co-founder Anne Stevenson-Yang said by telephone. “If you’re short you’re in a very difficult position because you have to buy the stock to get out, so you end with a heavily overvalued stock.”
GameStop didn’t immediately respond to a request for comment.
The stock’s gains were fanned late on Tuesday after Tesla chief Elon Musk tweeted a link to a Reddit thread about the company. But famed fund manager Michael Burry warned that the manic rally has got out of hand, calling the stock’s rise “unnatural, insane, and dangerous”.
“It really just goes to show the classic saying that markets can stay irrational longer than you can stay solvent,” said Greg Taylor, chief investment officer at Purpose Investments. “So you can try to fight this as long as you want but at some point you just have to give in and just step to the sidelines. That feels like the phase of the market we’re in right now, where things are going a little crazy and definitely divorced from fundamentals.”
Another note of caution was provided on Wednesday by Bank of America analysts. While raising their price target to $10 from $1.60 to reflect the stock’s recent surge, they noted that GameStop is in “a weaker not a stronger place” and reiterated their underperform recommendation.
“While it is difficult to know how much very high short interest and retail ownership could continue to put upward pressure on the shares, we think fundamentals will again factor into valuation,” analysts led by Curtis Nagle wrote in a note. “We remain sceptical on the potential for a turnaround.”
Euphoria born in day-trader chat rooms has turned GameStop into the biggest story stock of the retail era, its improbable surge an emblem of the newfound power of individual investors. At the same time, it’s become a major headache for institutional investors betting it would fall.
“It is unwise to try to stand on principle against an angry mob,” said Wedbush Securities analyst Michael Pachter, who had a price target of $16 for GameStop as of January 11. “The shorts have to mark their investments to market value, so if they’re short at $20 thinking the stock will go to $10 and it goes to $300, they lost $280 trying to make $10. Frankly, I’m surprised they didn’t close much lower than here.”
The epic short squeeze has set off a search for other companies that might be similarly vulnerable, with Express, Bed Bath & Beyond and AMC Entertainment Holdings among stocks surging on Wednesday.
Online brokerages including Robinhood Markets and Charles Schwab were hit again by service disruptions as the wild swings transfixed traders. TD Ameritrade told clients in a message that it has put in place several restrictions on some transactions in GameStop, AMC and other securities.
“The thing about these manias is there’s always enough people who make 600% or 1,000% and tell everybody about it that everybody gets excited about it,” said Anne Stevenson-Yang. “The thing is it’s not the majority of those people and eventually a whole bunch of people lose money.”
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