In GameStop fight, smaller investors outduel big funds
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 the1%.
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 brokerages offering free-trading apps. It’s also left more invesotrs on Wall Street asking if the stock market, which set a record this week as the pandemic still rages, 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, acknowledged 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, with manager Gabe Plotkin telling 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. The company has been losing money for years as sales of video games increasingly go online, and its stock fell for six straight years before rebounding in 2020.
That pushed many professional 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 earlier this month after a co-founder of Chewy, the online seller of pet supplies, joined the company’s board.