A Strange GameStop: The Only Winning Move Is Not to Play

Stock Market

The meme stock phenomenon seemed like it was over and done with. But, as seen from the latest movement from GameStop (NYSE:GME) stock, it’s not over just yet. Looking to beat the so-called “smart money” at their own game once again, retail investors, such as those active on Reddit’s r/WallStreetBets subreddit, are back in the game of bidding up their old favorites.

The storefront of a GameStop retail store.

Source: quietbits / Shutterstock.com

Sure, another Reddit favorite, AMC Entertainment (NYSE:AMC), is benefiting the most from the rally right now. Its opening price on May 28 was higher than it’s been in four years, over 50% higher than its late-January peak.

Shares in GME stock, the video game retailer with e-commerce aspirations, are still far from returning to their high water mark. But at that opening price of around $263 per share, an investor who bought at May 10’s $143.22 close would see their shares gain more than 80%.

So, should you hop aboard in the hopes that GME stock gets squeezed back to $483 per share? Or should you ignore the hype and go short as it trades well above GameStop’s underlying value?

How about a third option? To paraphrase the film WarGames, the only winning move with GameStop is not to play. All bets are off on which direction shares will go next. Too risky to buy, and too risky to short, it’s best to steer clear of this latest GME stock roller coaster.

Why The Reddit Set is Buying GME Stock Once Again

What’s sparking the renewed interest in shares of both GameStop and AMC? The same thing that kicked off the initial round of volatility: short squeezing. As the meme stock trend cooled in the spring, hedge funds may have thought the coast was clear.

Moving on from their winter losses, investors got back into the game, initiating or maintaining short positions in these overheated names that started to cool off. But the “smart money” investors again underestimated the Reddit set and are now paying the price. Starting in mid-May, online chatter about both names spiked. Realizing Wall Street was putting itself in a vulnerable position, users on investment subreddits started putting the squeeze on them a second time.

The result? On May 25 alone, the run-ups in both GME stock and AMC stock produced $754 million in short seller losses. The way things are playing out, we may be in for more wild moves in AMC. But the former? The second round of this bout between the hedge funds and the Redditors may soon be wrapping up.

So, can you take this opportunity to bet against it? Yes, there’s little in the form of underlying value backing today’s stock price. Yet betting against it is far from a slam-dunk opportunity.

Still Too Chancy to Short

At today’s prices, you can’t justify a buying of GameStop shares on their fundamentals. Yes, we are all well-aware of Ryan Cohen’s plans for the brick-and-mortar video game chain. The Chewy (NYSE:CHWY) co-founder, who has taken control of the company’s board, wants to turn it into an e-commerce powerhouse. There’s nothing so far to indicate that his plans won’t pan out.

But this metamorphosis is still in its early stages. It probably shouldn’t be factored in the way it is now in the GME stock price. At current prices, the company sports a market capitalization of around $17 billion. If investors stop trading this on momentum and start pricing it on fundamentals, this valuation won’t hold.

As our own Matt McCall discussed on May 3, a more reasonable value for the company, which factors in both its existing and potential e-commerce operations, is between $50 and $100 per share. In other words, a greater than 75% downside risk from today’s prices.

Yet, while it’s easy to make the bear case, that doesn’t mean you should go short today. For one, it’s too early to tell whether the squeeze is over just yet. It may be slowing down. But, the ball remains firmly in the Reddit set’s court. Also, this recent squeeze may recede. But with scores of investors still holding it as a bet on its potential e-commerce transformation, no matter the price, shares could remain inflated.

Bottom Line: It’s Best Not to Play With GME Stock

Reddit speculators may again be laughing all the way to the bank. “Smart money” short sellers may be stupefied how they got themselves backed into a corner a second time. But for those looking to take a position, it’s unclear which side (long or short) will prevail from here.

Some may see this as a short-squeeze play to ride back “to the moon.” Others may see it as a screaming short, a name they can fade all the way back to under $100 per share. But again, the best move with GME stock is not to play. With so much still up to chance, it’s too risky to go either long or short at today’s prices.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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