Smaller investors face down hedge funds, as GameStop soars

NEW YORK (AP) — A head-scratching David and Goliath story is playing out on Wall Street over the stock price of a money-losing video game retailer.

An army of smaller-pocketed, optimistic investors is throwing dollars and buy orders at the stock of GameStop — in direct opposition to a group of wealthy investors who are counting on the stock price to plunge.

The resulting action is wild, with GameStop’s stock soaring nearly 145 per cent in less than two hours on Monday morning, only for the gains to disappear quickly afterward.

The struggling company based in Grapevine, Texas, lost USD1.6 billion over the last 12 quarters, and its stock fell for six straight years before rebounding in 2020. So, it might seem like a strange place for the locus of so much movement. But GameStop has been a target of many professional investors, who say the company will continue to founder as sales of games continue to go online.

These investors have been betting that GameStop’s stock will fall. They “shorted” the stock, which means they borrowed shares and sold them, hoping to buy them back at a cheaper price and pocket the difference.

But such bets have been disastrous recently.

A woman walks past a GameStop store in Des Plaines, Illinois. PHOTO: AP

GameStop was trading at less than USD18 a few weeks ago. Its stock shot higher after the company named three new directors to its board on January 11 to help speed its turnaround, including a co-founder of online pet-supply retailer Chewy. The thought was that should help GameStop’s digital transformation.

A cavalcade of smaller investors, meanwhile, has been exhorting each other on the Internet to keep the stock’s momentum flying toward the moon. Many are pitching it as a battle of regular people versus hedge funds and big Wall Street firms.

It took just five days for GameStop’s stock to double after announcing its board shakeup.

This past Friday, it surged 51 per cent, a larger gain than big stocks like Apple or Exxon Mobil have ever had in a day. For GameStop, the 51 per cent move was only its second-best day of the month – and the month is not over.

The meteoric rise pushed some short sellers to get out of their bets, done by buying shares of the stock, and that helped accelerate its momentum even further. On Monday, the push and pull was so extreme that trading in GameStop’s stock was temporarily halted at least nine times for volatility.

It closed on Monday at USD76.79, after swinging between USD65.01 and USD159.18 earlier in the day.

“This is quite the experience for my first month in the stock market. Holding till infinity,” posted one user on a Reddit discussion about GameStop stock. A moment later, another user said, “We are literally more powerful than the big firms right now.”

That same sentiment carried well beyond Internet message boards to Wall Street itself.

“As someone who started trading stocks in the late 90s in college, I would always remember watching when the small retail trading groups would get crushed by hedge funds and savvy short-sellers,” OANDA Senior Market Analyst Edward Moya said in a report. “What happened with GameStop’s stock is a reminder of how times are changing.”