Why Is GameStop Stock Going Up?

The madness in

GameStop (NYSE:>GME

) stock earlier this year was one for the history books. It was fun while it lasted, but the mania that drove this stock to record highs has all but played out. So, why hasn’t this bricks-and-mortar chain turned aspiring e-commerce play fully collapsed yet?

a sign on the side of a building: GameStop video game and electronics store logo sign in Bay Terrace, Queens, NY. © Provided by InvestorPlace GameStop video game and electronics store logo sign in Bay Terrace, Queens, NY.

Namely, it still has a devoted fan base with

Reddit speculators, many of whom continue to hold it with “diamond hands” (in r/WallStreetBets parlance). Even as its valuation remains fully out of sync with its fundamentals, so far they’ve refused to sell.

Why? Believing in not just the “short squeeze” play with GameStop (which is over and done-with, by the way), but the turnaround angle as well, they still see it as a stock worthy to own at any price.

As they continue to hold it, the stock could hold steady at its current triple-digit prices (around $175 per share). Yet, at some point, these “diamond hands” will get “paper hands.” That is, Reddit speculators will become impatient, and cash out while the going’s still good.

In turn, this will create another round of heavy downward pressure on shares. It may not push them back to pre-madness levels (under $20 per share). But, even a pullback to $50-$75 per share would be bad news for those who bought it at or near today’s prices.

So, what’s the best move? It’s hard to say when exactly the bottom will fall out. But, it’s eventually going to happen. Getting ahead of trouble, sell it if you own it. And avoid with a capital A if you don’t.

A Successful Turnaround Won’t Put More Points Into GME Stock

With Ryan Cohen now running the show, I can see why some are bullish he can pull off a turnaround. Under his helm, the company is shaking up its C-suite. It’s set to have an executive team chock full of e-commerce and tech industry veterans.


Gallery: 4 Heavily Shorted Stocks Primed For a Big Move (InvestorPlace)

>Full screen 1/5 SLIDES © InvestorPlace
There are important things to keep in mind when it comes to heavily shorted stocks, particularly in a social media environment that has proven to be something close to a distortion field. First, short sellers aren't evil. They aren't destroying companies. They're betting against a stock price. Sometimes they make that case publicly. More often, they don't. Second, simply because they might be on the other side of the trade, they shouldn't be ignored. Indeed, we have recent evidence for exactly that point. 7 Homebuilding Stocks to Buy That Are Ready for Another Round of Gains A short seller warned investors about

Luckin Coffee (OTCMKTS:>LKNCY

) before that company admitted to a massive fraud. The information brought to light surrounding electric semi manufacturer

Nikola (NASDAQ:>NKLA

) was material yet wasn't known to the market. Short sellers aren't always right, but they aren't always wrong, either. Finally, owning heavily shorted stocks in hopes of a squeeze is a bad strategy. It worked for

GameStop (NYSE:>GME

), certainly. But even the squeeze part of the trade was over before anyone even really understood what happened. High short interest alone doesn't mean a short squeeze is on the way. Some readers might disagree with some (or all) of these individual points. But they comprise a broader argument: owning heavily shorted stocks isn't all that different than owning lightly shorted stocks. Investors need to do due diligence. They need to avoid confirmation bias. And they need to have a bull case for the stocks they own. These four heavily shorted stocks have that bull case:

National Beverage (NASDAQ:>FIZZ

)

World Wrestling Entertainment (NYSE:>WWE

)

1-800-Flowers.com (NASDAQ:>FLWS

)

SmileDirectClub (NASDAQ:>SDC

)

2/5 SLIDES © Source: Jer123 / Shutterstock.com

Heavily Shorted Stocks: National Beverage (FIZZ)

The short interest in FIZZ is inflated somewhat by the fact that about three-quarters of the company remains owned by chief executive officer Nick Caporella. Short interest as a percentage of shares outstanding is only about 6.2%, but that figure soars to 32% of the float. The bear case here seems to make some sense, and it centers on competition. FIZZ stock soared several years ago thanks to growth of its LaCroix sparkling water. That success brought in a wealth of new entrants, including

Coca-Cola (NYSE:>KO

),

PepsiCo (NASDAQ:>PEP

) and

Nestle (OTCMKTS:>NSRGY

). Those competitors seemed to have a path to taking LaCroix's market share or, at the very least, leading a "race to the bottom" in pricing that would pressure profit margins. That competitive risk still looms. But LaCroix has held its own. The 12 months ending Jan. 30 saw revenue rise 10% and earnings per share jump 43%. That's despite a pandemic that would seem to be only a modest tailwind at most, given LaCroix's popularity in offices and during summer outings. If the competition-based bear thesis doesn't play out, FIZZ stock has upside. Valuation is reasonable. The balance sheet is pristine. Bulls long have argued the company makes sense as an acquisition target, and that argument still holds. All told, the story seems stronger than shorts have argued and investors feared. As long as that remains the case, FIZZ should have upside.

3/5 SLIDES © Source: Tom Rose / Shutterstock.com

World Wrestling Entertainment (WWE)

The story for WWE stock is somewhat similar. A thin float, owing to the ownership by founder Vince McMahon, inflates short interest, which is just over 20% of the float. Skeptics have argued for years that disaster lurks just around the corner — yet the WWE business keeps grinding away. The company's creation of the WWE Network was widely panned — WWE stock lost about half of its value in a day — yet it turned out the company was actually ahead of the curve in streaming. The company now has leveraged that success into a partnership with

Comcast (NASDAQ:>CMCSA

) and its Peacock streaming service. There are risks. WWE's big stars don't shine quite as bright. The growth of mixed martial arts has added a new competitor for eyeballs and spending. The stock isn't exactly cheap. Still, betting on McMahon generally has been the right strategy, even if many short sellers argue otherwise at the moment.

4/5 SLIDES © Source: TonelsonProductions / Shutterstock.com

Heavily Shorted Stocks: 1-800-Flowers.com (FLWS)

It's somewhat unclear why FLWS continually makes the list of heavily shorted stocks. There are concerns, but none that generally rise to the point of being a catalyst for a short. That said, shorts have done quite well of late, as FLWS stock has plunged from nearly $40 in late January to a current $31. After the pullback, the stock does look attractive. The competitive environment is benign. 1-800-Flowers.com has run circles around rival

FTD Companies for years, to the point that FTD filed for bankruptcy in 2019. The expansion beyond flowers has paid off, with acquisitions of Harry & David and PersonalizationMall.com both doing well. The company obviously has dealt with pandemic-driven headwinds, but the long-term outlook still looks reasonably bright. An 18x forward price-earnings multiple looks attractive in that context. All told, it might be time for shorts to book profits.

Slideshow continues on the next slide 5/5 SLIDES © Source: Helen89 / Shutterstock.com

SmileDirectClub (SDC)

On the other hand, SDC stock seems like a more obvious short target. The company remains unprofitable, sits behind industry leader

Align Technology (NASDAQ:>ALGN

), and still has a market capitalization over $4 billion. That profile highlights the risks. But the potential rewards are big as well. Teledentistry would seem a market large enough for multiple winners. It's also a market that got a boost from the pandemic. Meanwhile, SmileDirectClub has managed to grow nicely of late. Profitability metrics are improving. The company seems to be on the right track — in a market that's been patient with growth stocks. It's still possible that shorts are proven right over the long term. But it's just as possible that they're wrong, and in a big way. On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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5/5 SLIDES

GameStop is also smartly taking advantage of its inflated stock price, with its recent $551 million secondary equity offering. Yes, it’s dilutive for current shareholders. But, considering the company today sports a $12.3 billion market capitalization, dilution is minimal. It’s a low-cost way to bulk up its war chest.

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With a change in vision, and plenty of cash to possibly turn this vision into a reality, the company may morph into a major e-commerce company. The issue, though, is that GME stock continues to trade as if it’s already a large online retailer.

Sure, “it could grow into its valuation.” But, with the pivot still in its early stages, it’s premature to say that it’s certain. Building itself into a leading e-commerce company will take time. And, with so many established names already dominating the space, GameStop has its work cut out for it. At best, this evolution will help keep the stock steady. However, it will do little to move the needle further for shares.

In fact, with disappointment in this transition the more likely outcome, a massive selloff may be just around the corner.

The Bottom Will Inevitably Fall Out

For now, the idea of an e-commerce shift is enough to keep the stock’s devoted fans happy. But, at some point, it’s going to have to deliver. And, with this strategy change likely a multi-year endeavor, it’s going to take more than a few quarters for it to make progress.

What does this signal? It may be tough to determine when exactly the bottom will fall out. Yet it’s definitely on the horizon. As mentioned earlier, as the months progress, diamond hands will increasingly become paper hands. But, with the “meme stocks” trend largely over, there are few new buyers willing to dive into this.

As possible sellers outnumber possible buyers, we’re going to see substantial downward pressure on GME stock. To what extent? The e-commerce catalyst, along with the war chest of cash, may mean shares have little chance of fully falling back below $20 per share (what they traded for back in early January).

A selloff may find a floor at much higher prices — say $50-$100 per share. A $3.5 billion to $7 billion valuation seems fair for a company that is looking to build on its approximately $1.5 billion in online sales last fiscal year. In other words, you might expect a possible decline as little as 42.9%, but as high as 71.4%.

Bottom Line: Continue to Steer Clear of GameStop

Its turnaround may pay off, and the company could thrive in the coming years. But, with its stock completely divorced from its fundamentals, this success will likely do little to boost the price of GameStop shares.

Worse yet, with little to support for today’s share price, a wipeout may be just around the corner. My view on GME stock remains the same: continue to avoid it.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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