So, what are we to make of BlackBerry (BlackBerry Stock Quote, Chart, News, Analysts, Financials TSX:BB) and GameStop (Gamestop Stock Quote, Chart, News, Analysts, Financials NYSE:GME) short squeeze development? Is this a momentary case of the monkeys taking over the zoo or are we looking at the changing face of investing, where retail power takes the reins?
Video game retailer GameStop hit a new high on Monday, climbing another 18 per cent to $76.79, which is a far cry from the five bucks and change the stock was worth last summer or even the $19.95 you could buy GME for on January 12.
That, of course, was before online investors stormed to the rescue and piled on short-sellers who disliked the company’s fundamentals. Chat forums like Reddit’s “WallStreetBets” saw a surge of support for the stock, matched by trading volume in recent days and pushing GameStop, habitually a target for shorts, to surprising heights. Also suggested as a potential trigger for the stock’s rise was news on January 11 that Ryan Cohen, activist investor and founder of online pet retailer Chewy, would be joining GameStop’s board.
Redditors on WallStreetBets were giddy with the realization of their own power, with posts mocking Gamestop shorters such as Citron Research’s Andrew Left.
“I’ve never seen guns like this. They can break shorts.”
Noted Wall Street mouthpiece Jim Cramer weighed in, and he was almost terrified.
“It’s the ‘wallstreetbets’ people.′ And they have ganged up, arguably allowed by free speech purposes, to center on a few stocks,” he said today. “I’ve never seen guns like this,” he added. “They can break shorts.”
As it goes in many cases and albeit to a more muted extent, Canada has its own version of the GameStop craze in perennial punching bag BlackBerry, whose shares have more than doubled in less than two weeks — though, in BlackBerry’s case, there’s a bit of actual news to back up the movement, with the company announcing last month a new partnership with Amazon AWS to work on the connected car and more recently a settlement with Facebook over a patent issue.
But BB’s sudden spike in share price is still shocker, says Globe and Mail columnist Andrew Willis who hearkens back to the dot-com bubble of two decades ago for comparison.
“The difference here obviously is the ability of small investors to communicate with each other and organize loose campaigns around specific stocks.”
“The difference here obviously is the ability of small investors to communicate with each other and organize loose campaigns around specific stocks. That’s a huge part of the GameStop story,” said Willis, speaking on BNN Bloomberg on Monday.
“There was a short-seller saying the stock was overpriced and then this mass of smaller investors basically said, ‘We love this story,’ and they had a forum to organize, the Wall Street Bets site on Reddit. I spent some time there this morning, it is a fascinating place,” Willis said. “There’s a lot of enthusiasm, no doubt about that, but it does feel the same way that BlackBerry felt back in 1998-2000 where some of the stocks were just going to the moon.”
“It’s the same kind of unbelievable performance, the same kind of unbelievable hype,” Willis said. “And then, when fundamentals once again take over, the same staggering drops — the volatility is unbelievable.”
For GameStop, the overriding account of events seems to be one where the intents of institutional investors are facing off against the growing masses of DIY traders, with the latter stealing the show if but for a few moments.
“A lot of these [online trading] platforms are being set up the same way the casinos are set up in that the house wins because they’re making a fraction of a cent on every single trade…”
“I’ve been on Wall Street for over 20 years and I cannot think of anything I’ve seen that’s nearly as insane as what’s going on with GameStop right now,” said Loop Capital Markets analyst Anthony Chukumba, speaking on Yahoo Finance on Monday. “This is not a situation like Tesla, for example, where the stock keeps going up and up but where at the end of the day they’ve got a great product, they’ve got a founder who’s a genius, they’ve got secular tailwinds.”
“[For GameStop], the stock price is going one way and the fundamentals are going in the complete opposite direction. This is truly insane, quite frankly,” he said.
“This is clearly individual investors, many of them have [online trading platform] Robinhood accounts, many of them are trading with options, on margins — they don’t really understand how stocks are supposed to trade. And the reason they can have such an outsized influence is because GameStop has such high short interest. Over 100 per cent short interest. So, you have [short sellers] who are covering their shorts and it pushed the stock higher,” Chukumba said.
And while the emerging prominence of retail investors — whether it’s bitcoin or the early days of Canada’s cannabis craze or now GameStop and BlackBerry — may ultimately have little long-term effect on the market, Willis says their growing impact is a sure sign that regulators need to step up their game to keep too many average Joes from losing their shirts.
“A lot of these [online trading] platforms are being set up the same way the casinos are set up in that the house wins because they’re making a fraction of a cent on every single trade,” Willis said.
“But individual investors have a great deal of difficulty in trading their way to wealth. The ability to day-trade your way to success is limited, and there are casino-like, addictive elements to playing these stocks and jumping in and out all the time and those sorts of tendencies are against the fundamentals of what it takes to build long-term wealth,” he said.
“I think these platforms do have an obligation, especially a fiduciary responsibility to ensure that investors are well informed, to ensure investors aren’t engaging in abusive behaviour,” Willis said. “In the old days, there was something called the ‘Know Your Client’ rule but on a lot of these platforms that simply doesn’t exist.”