“If you want to gamble, go to the casinos. This is not what the markets are for,” Loop Capital analyst Anthony Chukumba warned retail investors playing GameStop (GME).
“This is not investing,” he told Yahoo Finance Live during Monday’s trading session.
The video game retailer’s shares soared more than 130% before coming back down and briefly going negative during a wild trading session on Monday. Shares were temporarily halted for trading throughout the morning following a crush on short-sellers.
“I've been on Wall Street for over 20 years, and I cannot think of anything that I've seen that is nearly as insane as what's going on with GameStop right now,” said Chukumba. The analyst dropped coverage of the stock on January 11.
Last week, shares spiked more than 100% as a clash between short-sellers and Reddit WallStreetBets caused a massive short squeeze on the stock. A short squeeze forces those who bet against the shares to buy in order to forestall bigger losses, sending the stock price much higher.
‘The first line of troops goes down in a rain of musket fire ...’
What’s happening with GameStop is a “unique situation on the short-side” according to Ihor Dusaniwsky of S3 Partners.
The data company has been seeing a short-squeeze on older shorts who have incurred massive mark-to-market losses on their positions. However new shorts coming in use “any stock borrows that become available to initiate new short positions in hopes of an eventual pullback from this stratospheric stock price move.”
“Much like the Revolutionary War, the first line of troops goes down in a rain of musket fire but is replaced by the troops next in line,” said Dusaniwsky.
‘A perpetual short squeeze machine’
On Friday veteran trader Brian Shannon warned short-sellers against trying go against a stock like GameStop when it’s up too much.
“They’ll try to go in and short the stock, and then the stock rallies 10%, and they cover. And then what happens is it becomes a perpetual short squeeze machine,” Shannon told Yahoo Finance.
“If you look at short interest numbers, they’re rotating extremely fast right now. It’s a game of musical chairs. If you’re involved in it, if you’re looking to short it, wait for it to break down. There’s no such thing as up too much, “ said Shannon.
On Monday the stock was stripped of its only Outperform rating by Telsey Advisory Group. Analyst Joseph Feldman double-downgraded the stock to Underperform with a price target of $33 — currently the highest street price prediction.
The lowest price target on the stock is $3.50 by Credit Suisse analyst Seth Sigman. GameStop shares now have 4 Holds and 4 Sell ratings.
The story behind last week’s massive spike involves a response to short seller Citron Research’s recent prediction that shares of the video game retailer will drop to $20 a piece. Last Tuesday Citron’s managing partner Andrew Left announced he would list five reasons why the shares will plunge.
Reddit users dubbed WallStreetBets (WSB), a forum on the message board platform, pushed back on Left’s call and apparently helped create a massive short squeeze on the stock.
“I’ve never seen such an exchange of ideas of people so angry about someone joining the other side of a trade,” said Left in a YouTube clip last Thursday. He went on to list the reasons why he thinks the stock will go down to $20/share.
The reaction from reddit users and other retail investors sent the stock up more than 100% last week. On Friday, Reddit WSB users were celebrating the stock’s squeeze to record highs.
Also on Friday, Left said he would stop commenting on the stock.
“We are investors who put safety and family first, and when we believe this has been compromised, it is our duty to walk away from a stock,” Left wrote in a letter posted on Twitter.
The stock had been trending higher prior to last week. On January 12, shares were trading around $20/each after GameStop announced Ryan Cohen was joining the board of directors. Cohen is an activist investor and co-founder of pet retailer Chewy Inc (GME ).
In July of 2020, the stock was trading at around $4 a share.
Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre