In the past few days we have received a very large number of questions regarding Gamestop Corp (symbol: GME). A company whose stock started 2021 trading at $17.25 USD and in the pre-market on January 28th was trading over $500. The social media site Reddit , which acts like a conversational bulletin board, has become the latest tool to mobilize investors to a single cause. It is believed to be causing a massive spike in the price of a handful of stocks including Gamestop; AMC (AMC); Blackberrry (BB); Nokia (NOK) and American Airlines (AAL).
Gamestop is a “bricks and mortar” retail company focused on video games, consumer electronics, and services. For many mature investors this description should bring images of Radio Shack, or Circuit City (both bankrupt), and you would be right. As of January 28th, there are eight analysts covering the stock with an average target price of $12.50 .
This type of stock behavior is anything BUT normal, and it (rightly) leads investors to question how one could make money from it. When investors look back from the future fortunes will have been made and lost in a very short period of time. Books will be written; perhaps even movies produced above those who bet one way and won or lost big.
I cannot stress enough how risky this trading behaviour is. Investors are best served by fighting all feelings of FOMO.
Some have suggested that Reddit may be acting as a new form of fuel for individual stocks. If this means the Wall Street “game has changed”. If the social media power it presents could be likened to the harnessing of coal, oil, or uranium as energy for your portfolio growth. In the end, I believe what we are witnessing is simply a new form of stock manipulation – which is illegal and is likely to end very badly for the vast majority of participants.
Picture each stock like a ball sitting on a platform.
The ball represents the stock price and the platform its fundamental valuation.
As a company grows the platform rises. Earnings increase the book value per share. Investors, excited for the future possible earnings, jump onto the platform and “lift up” the ball. This means the stock is now trading above its book value per share. Since the earnings are rising, and pushing up the platform, investors view the premium price as justifiable.
Every now and then investors get excited about their “ball” and they throw it into the air pushing the price up further than it should go in the short term. The earnings continue to rise, and the platform goes up, but sooner or later that ball is pulled back to a more realistic level.
Those who buy into the stock while it is at elevated levels may experience some loss of capital as it returns to proper pricing, but as long as the underlying growth (platform) is rising they should eventually come out ahead on their investment.
Now picture that instead of throwing the ball into the air investors use a cannon….
My belief that this will end very badly. Investors should stay away.
This thesis is based on one simple reality. When a public company is trading too far above its appropriate valuation it can issue more shares. In the case of Gamestop issuing shares could give them lots of cash; and a higher book value per share; but without an acquisition it does not improve future earnings potential. In fact, the existing earnings would simply be diluted to more shareholders and, in theory, reduce the possible future returns.
AMC Entertainment Holdings Inc. (AMC) , which has also been involved in this trading bubble, has already experienced what will likely be considered direct corporate benefit. The company is in the middle of a share issuance and, as of January 28th, has seen $600M of its debt converted to stock. While I do not view the current $19 share price as even close to reasonable or attractive for investment, it is nice to know that the company is in a more solid financial position. This is good for the entertainment business, and especially good for fans of ‘The Walking Dead’ franchise.
i. Gamestop – www.gamestop.com – GameStop Corp is a U.S. multichannel video game, consumer electronics, and services retailer. The company operates across Europe, Canada, Australia, and the United States. GameStop sells new and second-hand video game hardware, physical and digital video game software, and video game accessories, mainly through GameStop, EB Games, and Micromania stores and international e-commerce sites, including www.gamestop.com, www.ebgames.com.au, and www.micromania.fr. The company has two main business segments: Video game brands and Technology brands. The technology brands segment sells wireless products and services and operates Spring Mobile managed AT&T and Cricket Wireless branded stores, along with the Simply Mac business.
ii. Reddit – “a network of communities based on people’s interests. Fin communities you’re interested in, and become part of an online community!” I have never used or been to Reddit, But Diane has. (www.reddit.com)
iii. It’s literally all they can talk about on CNBC. Earnings season, which is going on right now, has become a minor story.
iv. Source: Morningstar CPMS. Analysts include Credit Suisse who, as of January 11th, had a price target of $3.50. This report is available on request.
v. Options Trading – I have reviewed the possible use of calls or puts to take a position on the future decline of these stocks and the math simply doesn’t work. The bet is extreme. As of January 27th, with GME trading at $330, a March 110 Put had a cost of $48. While I believe the stock will drop below $62 and this trade could be profitable the amount of capital at risk is simply too high to execute. Spread trades were also considered and found to be too risky.
vi. Fear of Missing Out – yes, the footnotes are getting gratuitous.
vii. Book Value – In the simplest terms this is the breakup value of the company if it were converted to cash and distributed to each shareholder equally.
viii. According to Thompson Reuters GME earned $1.42 per share last quarter but lost $4.25 per share over the past 12 months.
ix. AMC Entertainment Holdings Inc.- AMC Entertainment Holdings Inc is involved in the theatrical exhibition business. It owns, operates or has interests in theatres located in the United States and Europe. It provides best-in-class amenities such as plush, power recliners, MacGuffins full bars, AMC Dine-In Theatres, premium presentation. Average of 7 analyst price targets (CPMS) is $2.00 USD. January 26th report from Credit Suisse (Underperform; Target $1.55) available on request
This comment could have been expanded to include comments on Bitcoin and Robinhood and their relation to this story….but I can cover that another time.
National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA).
The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF.
I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF.
The information contained herein has been prepared by Jay Nash, an investment advisor at NBF. The opinions expressed do not necessarily reflect those of NBF.
The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.
** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **