The GameStop Bear Squeeze January 2021

Hedge Funds vs The People?

Posted by Gary Smith on Jan 29, 2021

GameStop is a bricks and mortar digital games and electronics shop. At 1st February 2020 it had 5,509 stores worldwide. It had been hit hard by the pandemic, but even before that it was making substantial losses. It lost $470mn in 2019, and $673mn in 2018. It made a small profit of $34mn in 2017.

GameStop logo

With the share price at $20 it was capitalised at around $1.4bn. At it's peak share price, in January 2021, of $483, it was capitalised at $33.6bn.

This massive rise in the share price in such a short period of time was due to a bear squeeze.

The reason GameStop was so vulnerable to this bear squeeze was the extreme extent of the shorting against the company by hedge funds and others. (Shorting is when a hedge fund sells shares expecting to be able to buy them back at a lower price later to make a profit.)

According to Yahoo Finance 102% of the share value of the company had been shorted on 31st December 2020. I have seen claims this could have been as high as 140%.

It appears that a group on reddit, Wall Street Bets, co ordinated a buying surge in the shares. Because the stock was so shorted buying the shares caused the share price to lurch higher. Hedge funds scrambled to cover their losses by buying back the shares they had sold. One fund could have lost $3bn because of the share price action.

The market authorities are investigating whether this action by the reddit group was market manipulation. It probably was. But the real question here is how did the authorities allow for this company to be so shorted in the first place? 102%? It was a disaster waiting to happen.

Gamestop share prcie January 2021

Source Google Charts

 

Gary Smith, 29th January 2021