By Cody Willard
Here's the reality: GameStop has few growth prospects and questionable survival potential
The suspension of disbelief that watching a movie requires reminds me of people who are buying meme stocks now.
Suspension of disbelief means ignoring the silliness and even the implausibility of what's happening in a movie - or a stock. When you see someone on a social-media platform post a picture of a man playing videogames that causes a struggling videogame retailer's - in this case GameStop (GME) - stock to go up 300% in the premarket, it feels like you're watching a movie because you can hardly believe it's happening in real life.
Honestly, I somewhat enjoyed watching GameStop's stock go wild after someone on Reddit (RDDT) posted a screenshot of an account holding millions of dollars in GameStop stock and call options. But I wouldn't want to play the GameStop trading game.
Whoever posted on Reddit might or might not be the same Roaring Kitty who helped create the "Mother Of All Short Squeezes" (MOASS) in GameStop stock in 2021 by rallying retail investors to plow their money into GameStop and force hedge funds to buy the stock to cover their naked short positions.
The poster might not even own those millions of dollars of GME stock and options. But many retail investors immediately suspended disbelief and plowed their money into GME.
Short sellers in short supply
The biggest problem for those trying to create a new MOASS in GameStop now, compared to 2021, is that hedge funds are no longer nakedly short GME. In 2021, the short interest in GME was over 100%, meaning many hedge funds in all probability had sold GME shares without actually borrowing them first, which is required when short-selling a stock.
Let's back up for a moment and explain what short-selling and naked short-selling are. Imagine you go to a party on a Friday night, and the hosts run out of beer. You have a good friend with a couple of cases in her basem*nt, so you run over to her house and ask if you can borrow those cases for a couple of days. You take them back to the party and sell each can of beer for $10. You're now "short" two cases of beer because you borrowed and then sold the beer. On Monday morning, you buy two cases of Coors at $1 a beer, replace the beer you borrowed, and make 90% on the trade - an honest short sell.
On the other hand, a person with lesser ethics might have "borrowed" (i.e. stolen) the beer without telling their friend and then went and sold it at the party for $10 a beer. When the friend sees her beer is gone, she calls the cops, who arrest you. By the time you get out of jail, there's been a beer shortage, and a case of Coors now costs $100 a beer. You have no choice but to buy that beer to replace what you "borrowed"/stole. You just lost 1,000% on that trade - an illegal naked short sell.
Back in 2021, when Roaring Kitty helped build an army of retail investors that created the MOASS on GameStop, there were naked shorts who had sold GME shares without borrowing them first. Every GME short seller, like our beer short seller, has to buy back those shares at some point and return them to their rightful owners (unless the stock goes to zero). When 150% of the total shares outstanding were sold short, it meant retail investors (by buying GME stock en masse) could force those short sellers to buy back GME at higher levels as they got margin calls from their brokers, as in the $100-a-beer example.
Now, however, just 20% of all outstanding GME shares are sold short, meaning those short sellers can probably cover their shares more easily and won't be squeezed as hard as in 2021. In other words, it would take significantly more money from retail investors buying GME to force the same kind of squeeze we saw three years ago, and that probably isn't going to happen again.
Full stop on GameStop
Meanwhile, GameStop is still a struggling videogame retailer with little growth prospects and questionable survival potential over the next five years. If you're in the business of building wealth slowly but surely and as safely as possible, you probably want to avoid this entire GameStop movie. Stick with revolutionary companies like Tesla (TSLA), Meta Platforms (META) and China's Tencent Holdings (TCEHY), which are changing the world.
Cody Willard is Chief Investment Officer at 10,000 Days Capital Management and the publisher of TradingWithCody.com, a subscription trading newsletter offering real-time trade alerts.
Willard and/or 10,000 Days Fund LP were net-long META, TSLA, and TCEHY at the time of publication. Positions can change at any time and without notice.
More: One theory on how Roaring Kitty amassed such a giant GameStop position
Also read: Latest GameStop stock rally fueled by 'baseless speculation,' brokerage CEO says
-Cody Willard
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06-05-24 1517ET
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