GameStop shares soar when short sellers take a hit

Font size

Short sellers from

GameStop

stock has just been pressed. Shares of the video game retailer were up nearly 94% on Wednesday, although its closing profit shrank to around 57%.

In an email to Barron’sS3 Partners’ Ihor Dusaniwsky pointed to optimism after news on Monday that Chewy co-founder Ryan Cohen and two other former Chewy executives were joining GameStop’s board of directors (ticker: GME). That, coupled with the holiday sales results, seemed to cause “a long-term tsunami”, according to Dusaniwsky

Barron’s noted recently, citing S3 Partners’ short selling data, that the stock appeared to be poised for a short squeeze, when demand for a stock rises momentarily as investors rush to hedge bets that the price will fall. Investors have been betting against GameStop stock, given industry trends such as the growth of free online games. Consumers’ growing tendency to buy games online instead of buying in stores for copies has put the company’s physical disc business in a tricky place.

With growing competition from ecommerce sites and larger retailers such as

Walmart

(WMT),

Best Buy

(BBY) and

Target

(TGT), it will likely take a bold new strategy for GameStop to turn things around. Investors seem to be betting for now that Cohen and the company can find one.

At its close on Wednesday, more than 143.5 million GameStop shares were traded – nearly double the previous volume record of 77.15 million shares on Oct. 9, according to Dow Jones Market Data. The stock closed 57% higher at $ 31.40, the highest close since August 2016.

According to S3’s Dusaniwsky, short sellers were down $ 812 million in mark-to-market losses.

“While I agree that we are seeing some shorts being pushed out of their positions due to massive mark-to-market losses today, this is a lot like the chicken-and-egg question,” Dusaniwsky wrote, adding that he believes that buying long led to short coverage, rather than the other way around.

Dusaniwsky does not expect a major drop in the number of short sellers in the coming days, noting that short sellers lost $ 968 million in mark-to-market losses in 2020. Instead of getting out, short sellers increased their positions .

Ronnie Moas of Standpoint Research cut the stock after moving to Hold from Buy. Moas noted that he recommended the name on Dec. 29, 2016, when the stock was trading around $ 25.

“I can no longer leave my highest recommendation attached to this name given the recent absolute and relative move,” he wrote on Wednesday.

GameStop stocks have had its fair share of one-day pops. A deal with

Microsoft

caused a 44% rally on Oct. 8, but analysts noted that it seemed like an everyday announcement of a cloud-based infrastructure. Even with some profit-sharing on GameStop’s sale of Microsoft’s Xbox Game Pass Ultimate, the needle didn’t seem to move.

“The profit share helps, but may not be incremental to the lost revenue / profit from the shift to digital. And more digital still means less second-hand [games], the biggest driver for profit and loyalty [for GameStop], ”Wrote Credit Suisse analyst Seth Sigman at the time.

Write to Connor Smith at [email protected]