GameStop
GameStop
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The GME Saga

Just like any hot stock that disconnects from fundamentals in an extreme way, it becomes a ticking time bomb before it crashes back down to reality. It’s unclear where the GameStop stock will trade over the coming days and months, but trees don’t grow to the sky.

-George Hadjia

 

One of the most incredible stories of stock market speculation in recent memory is the GameStop (NYSE: GME) frenzy that has played out over the last month. GME is a struggling brick-and-mortar video game and electronics retail chain. The company’s sales had been declining for years, with GME producing steep losses. GME’s sales had debased from $9.5 billion in fiscal year 2011, to $6.4 billion in fiscal year 2019. Net income fell significantly from $339 million in fiscal year 2011, to a remarkable loss of $470 million in fiscal 2019. This is all during a time where the global gaming market actually expanded by 2.5x since the last console cycle.

In late July 2020 GME was trading at around $4 per share. The COVID-19 pandemic had only worsened the headwinds for the company, accelerating this shift towards digital game purchases as GME was forced to shutter stores. When they eventually reopened traffic was weaker as some people were reluctant to walk into stores during a pandemic to purchase a game, particularly when it could be purchased online. Despite these headwinds, GME stock rocketed over the subsequent months, reaching a high of $347.51 per share on 27 January 2021.

So what caused this? Certain members of the retail investing community (i.e., individual investors where investing is not their full-time profession) noticed the high short interest in GME. The animal spirits of the online retail investor community combined to create an enormous short squeeze, driving up GME stock.

Back in September 2020, a Reddit user called u/Player896 posted a piece titled Bankrupting Institutional Investors for Dummies, ft GameStop on the sub-Reddit called r/WallStreetBets. This is a forum for market pundits to discuss stocks, often resulting in comical memes and character names. This online community has 2 million members, with hundreds of thousands perusing its posts at any given moment.

The r/WallStreetBets users recognised GME’s immense short interest, and its vulnerability to a short squeeze. In the comments section, they revelled in what they perceived to be the pending decimation of anyone who was short GME. “gme shorts you are going to get herded on tomorrow morning. Max pain. You are screwed. Enjoy the night”, wrote one user called eagles78_87. “The squeeze is going to be insane”, wrote another.

In late November 2020, one of the Reddit users ascertained that Melvin Capital, a successful NYC-based hedge fund, had staged a material negative bet against GME. Melvin had disclosed a large put option position in GME, which would yield a profit if the stock price fell. The r/WallStreetBets user speculated that they were probably buying put options because they couldn’t find any more shares that they could borrow to sell short. In other words, there was the view that Melvin had a large wager that GME stock was going to fall. The r/WallStreetBets community were enraged and sought to torpedo the short position of Melvin Capital and other hedge funds. “I don’t feel bad at all taking money from these rich greedy hedge fund managers”, a user commented on the forum. The GME saga morphed into a form of postmodern class warfare, pitting day traders on internet message boards against a sophisticated multi-billion dollar hedge fund. It was the David versus Goliath battle of the twenty-first century.

Many retail investors piled in. What the wise did in the beginning, with buying GME as a deep value play, morphed into fools prospecting for illusory gold. They bought GME on the erroneous hope of the stock continuing to march higher, justified not by fundamentals, but the misguided belief that there would be someone else to buy the stock for an even higher sum. As Voltaire once said, “History never repeats itself. Man always does”. The GME story is a lesson of greed, and underscores some of the immutable laws of human behaviour. Just like any hot stock that disconnects from fundamentals in an extreme way, it becomes a ticking time bomb before it crashes back down to reality. As we start February of 2021, GME has fallen back down to below $100. It’s unclear where this stock will trade over the coming days and months, but trees don’t grow to the sky.

 

George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

 

Our Montaka Long Only funds strive to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka Variable Net funds, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark.

Our Montaka Active Extension funds strive for maximised return over the long-term. Owning the Montaka Variable Net long portfolio typically scaled up to approximately 130 percent - and the Montaka Variable Net short portfolio typically scaled down to approximately 30 percent – this these funds results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net funds strive for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this these funds are our flagship long-short.

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Our Montaka Long Only funds strive to act as a core, high conviction, global portfolio holding. Consistent with the long portfolios in our Montaka Variable Net funds, this offering is focused on owning the world’s high quality, undervalued businesses – and cash when appropriate – to outperform its benchmark.

Our Montaka Active Extension funds strive for maximised return over the long-term. Owning the Montaka Variable Net long portfolio typically scaled up to approximately 130 percent - and the Montaka Variable Net short portfolio typically scaled down to approximately 30 percent – this these funds results in a net market exposure of approximately 100 percent most of the time.

Our Montaka variable net funds strive for significant downside protection – but with minimal upside reduction. Focused on owning the world’s great and growing businesses when they are undervalued, while managing a portfolio of short positions in businesses that are deteriorating, misperceived, and overvalued, this these funds are our flagship long-short.