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GameStop is a “greater fool” trade, this investor says

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GameStopMore volatility in GameStop (GameStop Stock Quote, Chart, News, Analysts, Financials NYSE:GME) means more reasons to stay away from this circus, says Shane Obata, portfolio manager at Middlefield Capital, who says investors should avoid the Reddit-rallying stock like the plague because it depends on finding the “greater fool“.

“We are totally avoiding any exposure to that area. We’re kind of just watching it and finding it somewhat entertaining but also somewhat scary,” says Obata, speaking on BNN Bloomberg on Wednesday.

GameStop got halted a total of seven times midday on Wednesday as the market took GME for another trip around the bend, opening at $269 and hitting a remarkable $347 by 12 pm — only to fall back to $200 within the hour. The stock ended the day at $265 per share.

All that volatility was still muted compared to the alternate reality trading that went on in January, where GameStop, a video game retailer whose prospects in the age of streaming and online downloads have been roundly questioned, had its banner taken up by retail investors ready to flick a few daggers at hedge funds and the institutional investment crowd.

 

“What’s the end game? If one person buys from the next and then it keeps moving higher, eventually it’s going to turn the other way, so it’s very tricky…”

 

The David v. Goliath drama played out pretty well for some when GME went from sub-$20 territory to over $400 in the blink of an eye, while others got their hat handed to them, either in the form of short squeezes reportedly costing billions or, in the case of the DIY investor, losses stemming from being at the wrong end of a bad trade.

Platforms like Robinhood and Wealthsimple have opened up stock trading to a new cohort of investors, but there are good and bad consequences to be had, says Obata.

“I think the general trend and growing interest and investment is positive, as historically, maybe [investing] was something that was more reserved for people who already had substantial amounts of wealth,” said Obata.

“Now, as information is so plentiful and there are easy ways to access the markets, it’s great that more people are getting interested, but the kind of manias that we’re seeing on some of these meme stocks are pretty scary because, what’s the end game? If one person buys from the next and then it keeps moving higher, eventually it’s going to turn the other way, so it’s very tricky,” he said.

“So, no, we don’t own any GameStop,” Obata said.

This week, the US Senate contemplated where this is all going in a hearing called, “Who Wins on Wall Street? GameStop, Robinhood and the State of Retail Investing.” Members of the Banking, Housing and Urban Affairs Committee heard not only of GameStop’s antics but of what was called the wider disconnect over the past year between how the market behaved (it went up) compared to the state of the economy in the midst of a pandemic (it shrank pretty good).

“There are real people who got caught up in the frenzy who suffered real consequences,” said committee chairman Sherrod Brown. “If the people who are busy working, watching their kids, or living their lives can’t make sense of the stock market’s booms and busts, they’ll continue to lose faith in the market. And hedge funds and insiders will continue to reap the vast majority of the profit.”

Meanwhile, acting US Securities and Exchange Commission leader Allison Herren Lee delivered a letter this week to Senator Elizabeth Warren, who had called for the SEC to look into the GameStop phenomenon. Lee’s letter called for a number of new rules to counter what’s seen as an increased risk for investors, including better disclosure from companies taking short positions on stocks and strengthened rules around options trading.

The more recent action for GME has been connected to a report that GameStop shareholder and founder of e-commerce company Chewy, Ryan Cohen, has been selected to lead GameStop’s push into e-commerce.

Market analysts have weighed in on the GameStop stock, with BNN Bloomberg quoting TD Ameritrade chief market strategist JJ Kinahan, who said of investors buying GME, “I think you’re running into a burning building — that’s truly the easiest way to say it. You can be a hero but you can also be the guy who they’re holding a funeral for.”

Swissquote analyst Ipek Ozkardeskaya said, “Given the massive volatility in this stock, the risk is huge as the rally in the GME stock price is boosted by expectations of future growth, and is not based on concrete results for now.”

GameStop is reporting its fourth quarter and full year 2020 financials on March 23. The company last reported in December where its third quarter saw net sales drop 30 per cent year-over-year to $1.005 billion. Management attributed the drop in revenue to a number of factors including the now seven-year-long current generation console cycle, a delay in the release of a number software titles and an 11-per-cent decline in retail store outlets.

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About The Author /

Jayson MacLean
Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

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