Small investors outdueling hedge funds for GameStop
Across most of America, GameStop is just a place to buy a video game. On Wall Street, though, it’s become a battleground where swarms of smaller investors see themselves making an epic stand against the 1%.
The funds serving the financial elite are starting to walk away in defeat. Big bets they made that GameStop’s stock would fall went wrong, leaving them facing billions of dollars in collective losses. All the wild action pushed GameStop’s stock as high as $380 on Wednesday, up from $18 just a few weeks ago.
The stunning seizure of power gives some validation to smaller-pocketed investors, many of whom are encouraging each other on Reddit and are trading stocks for the first time thanks to all the brokerages offering free-trading apps. It’s also left much of Wall Street asking if the wildness is proof the stock market, which recently traded at record levels, is in a dangerous bubble about to pop.
Two investment firms that had placed bets for money-losing GameStop’s stock to fall have essentially thrown in the towel. One, Citron Research, said Wednesday in a YouTube video that it unwound the majority of its bet and took “a loss, 100%” to do so. But Andrew Left, who runs Citron, said that does not change his view that GameStop’s stock will eventually go down.
“We move on,” Left said. “Nothing has changed with GameStop except the stock price.” He also said he has ”respect for the market,” which can run stock prices up much higher than where critics say they should be, at least for a while.
Melvin Capital is also exiting GameStop. Manager Gabe Plotkin told CNBC that the hedge fund was taking a significant loss. He denied rumors that the hedge fund will fail. The size of the losses taken by Citron and Melvin are unknown.
Before its recent explosion, GameStop’s stock had been struggling for a long time. It has lost $1.6 billion over the last 12 quarters as video game sales increasingly go online,anditsstockfellforsixstraight years before rebounding in 2020.
That pushed many investors to make bets that GameStop’s stock will decline even further. In such bets, called “short sales,” investors borrow a share and sell it in hopes of buying it back later at a lower price and pocketing the difference. GameStop is one of the most shorted stocks on Wall Street.
But its stock began rising sharply earlierthismonthafteraco-founderof Chewy,theonlinepetsupplier,joined the company’s board. The thought is that he could help in GameStop’s
transformation as it focuses on digital sales and closes stores. Its shares jumped to $19.94 from less than $18 on Jan. 11. At the time, it seemed like a huge move for the stock.
Smaller investors were meanwhile encouraging each other on Reddit and elsewhere online to push GameStop’s stock ever higher.
Beyond personal attacks, the battle has also created big financial losses for Wall Street players who shorted GameStop’s stock.
As GameStop’s gains built and short sellers scrambled to get out of their bets, they had to buy shares to do so. That accelerated the momentum even more, creating a feedback loop. On Tuesday, short sellers of GameStop were down $5 billion in 2021, according to S3 Partners.
Much of Wall Street remains pessimistic that GameStop’s stock can hold onto its immense gains. The company is unlikely to start making big enough profits to justify a $300 stock price anytime soon, analysts say.