In January, a group of traders offered GameStop (GME) Stocks from $ 20 to $ 483. It might have gone even higher if the brokers hadn’t tried to impose trading limits on this beleaguered video game dealer.
In the meantime, the pool of buyers grew within a few hours. And they quickly teamed up to buy AMC Entertainment (AMC), Silver stocks, and even some biotech companies.
This wildcat action resulted in broker defaults and even a call to the CEO of online broker Robinhood to testify before Congress.
The rise of the GameStop populists
Most people buy stocks because they see them as a solid company with upside potential for shareholders.
Members of the social media platform Reddit’s «WallStreetBets» community have given the share an optimistic assessment over the past year.
These GameStop dealers had an additional motive. They targeted stocks that Wall Street had made big bets on because of its lack of promise.
GameStop, a video game-era dinosaur, fits that bill perfectly. Online video game distribution has dwarfed GameStop’s core business.
These investors, meanwhile, have been encouraged by the addition of former pet food e-commerce CEO Ryan Cohen to GameStop’s board of directors. If Cohen could figure out how to sell pet food online, why not video games?
Time will tell if GameStop continues to lose business to online vendors or choose to disrupt itself Netflix (NFLX) did in 2007 when it turned into a streaming sensation.
Why did Redditors decide to go on strike now?
Before last week’s fireworks, GameStop was the most severely trimmed stock on the market. You can measure this by looking at a metric called «Short Interest as a Percentage of Float».
This is the number of «short shares» divided by the number of shares the company has issued.
Currently, GameStop has a short interest as a percentage of the float of 113%.
This means that more shares will be sold short than the total number of shares issued by GameStop!
This dynamic, coupled with an improved outlook, made GameStop the perfect short-squeeze target.
The big squeeze
Brief bottlenecks occur when many investors – or some with big money at stake – sell short a stock. That is, they borrowed stocks with the expectation that they would buy them back at a lower price.
When many other investors start buying the stock and increasing its price, the shorts (often large hedge funds) are forced to buy back the stock at the current market price. In this case, the stock was much higher, which was a huge loss.
This is exactly what happened to the hedge fund that Reddits users are targeting: Melvin Capital Management.
The long-short hedge fund has borne the brunt of GameStop populism. The five-star fund, formerly run by protégé Steve Cohen, lost more than 50% of its value in January 2021.
In total, Melvin Capital and others lost a total of $ 19 billion when they cut GameStop.
Everyone loves a good financial fable where the little guy wins – even when Wall Street tries its best to stop him.
And some people won. Like the Missouri father, whose $ 4,500 investment resulted in a $ 1 million paper profit. I hope he took profits before GME fell back to earth almost as quickly as it skyrocketed.
The best story I heard was about a 10-year-old boy from San Antonio who cashed out when he saw his stake go from $ 60 to $ 3,200 in «short» order. The boy and his mother plan to deposit $ 2,200 into his bank account and put the rest back into it.
Here is what to buy next
There are three key factors when it comes to capitalizing on GameStop populism.
- First, the company must fall dejected, unloved, and disgraced.
- Second, the company must have an extremely high short interest as a percentage of the float.
- Third, the company must have an improving outlook, which can cause the stock price to rise and force the short positions to cover their position.
A company that fits into this shape is Missile Companies (RKT).
Rocket is a pioneer in the mortgage lending business and holds a 10% market share. However, since going public in 2020, this app-based lender’s stock has moved sideways. At the same time, the short interest as a percentage of the float has risen to 36%.
With triple-digit sales growth and a large overall addressable market in the mortgage industry, the outlook for RKT is solid. And if stocks rise quickly, another brief press could unfold.
Another good choice is GoodRx Holdings (DDRX).
The San Diego-based company helps customers purchase prescription drugs from the cheapest source.
By improving price transparency and looking for pharmacies with the best prices, DDRX is trying to disrupt the existing health model.
And it could very well work.
Sales have increased by more than 50% in the past three years. With a total addressable market of $ 300 billion, the company has a long growth path.
Given that GDRX has a short interest as a percentage of the 31% float, the company could be the next beneficiary of GameStop populism.
Another stock that might see a nice pop is this PetMed Express (PETS).
PETS is a leading nationwide animal pharmacy based in Delray Beach, Florida. It markets over 3,000 prescription and non-prescription drugs for dogs and cats directly to consumers.
- While Rocket and GoodRx operate in higher growth markets, PETS offers an income advantage with its hefty dividend yield of 3.8%.
PETS also has a low payout ratio of 73% which tells me the dividend yield is safe. The company also has a short stake as a percentage of the float of 32.5%, meaning it could benefit from a massive short squeeze.
Even if the Redditors never make a coordinated trade again, these stocks have plenty of reasons to go higher in a short period of time.
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