GameStop

Experts Weigh in as Reddit Users Spark ‘Remarkable' GameStop Stock Surge

NBC Universal, Inc.

What's happening with GameStop stock right now is nothing short of "remarkable," experts say, as the world watches with shock, and for some unease, at what a group of Reddit users have managed to do.

According to CNBC, a "band of Reddit-obsessed retail investors" have somehow sent GameStop stock up 1,500% in a two-week time frame, "squeezing out short-selling hedge funds."

By motivating each other in a Reddit chat room, amateur traders have been piling into shares and call options, "coordinating a monstrous short squeeze in the brick-and-mortar video game retailer," CNBC reported.

So what does that mean exactly for the stock market?

“The events that have unfolded in GameStop’s traded stock are remarkable," Matthew Lyle, associate professor of accounting information and management at Northwestern University’s Kellogg School of Management, said in a statement. "They are remarkable not just because of the ‘short squeeze’ but because of who seems to be driving the short squeeze. What is extraordinary is that this does not appear to be caused by a few well-known trading firms pouncing on a few other well-known trading firms, but instead appears to be caused by a large set of ‘retail’ traders pouncing on professional trading firms that hold large short positions."

According to Lyle, such a feat would typically only be possible "by highly sophisticated and deep pocketed trading firms," but this group proved that assumption wrong.

“They appear to have been able to mount a massive amount of buying pressure for GME, driving the price higher and forcing the trading firms that have large short positions into a situation where they are experiencing incredibly deep losses," Lyle said. "To unwind these positions the trading firms must buy at an ever-increasing price, making the losses worse and because of ‘margin requirements and margin calls’ this can force further unwinding, driving the price up even more, which then causes more unwinding and higher prices again and so on until it is over."

Similarly, Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC "retail investors with the help of technology acting as a union in attacking is a new phenomenon."

"You combine the power of technology, which allows you through Reddit postings to magnify your individual impact, with some use of leverage and very targeted bets, they can have a significant influence, particularly on areas of vulnerability because of the short positions," Paulsen said.

Last week, the stock had closed at around $39 per share. On Wednesday, that number had ballooned to $347.

According to CNBC, several Reddit users have been posting screenshots of their brokerage accounts, some touting "astronomical returns north of 1,000% in a handful of days."

“If you are lucky enough to be in a long position (holding the stock or a call option on the stock) while the price is increasing, it is obviously an amazing return over a very short period. But if you get caught holding the position when it is over — historically, it is a rapid and large drop back to a price that is closer to being justified by fundamentals," Lyle said.

According to Lyle, the most "optimistic analyst price target in the market" currently is at $33.

“Nothing over the last week has changed about GameStop as a company, it is still expected to struggle to turn a profit as a ‘brick and mortar’ company competing with online giants like Amazon," he said.

CNBC reports the trend is unnerving many on Wall Street, with Quincy Krosby, chief investment strategist at Prudential Financial, saying "it could potentially destabilize the overall market and the confidence in the market."

The amateur investors have also reportedly added other heavily shorted names to their list of targets, including AMC Entertainment and Bed Bath & Beyond.

Contact Us