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Despite the Reddit Rebound, Stay Away From GameStop Shares

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Thomas Niel
·4 min read
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When I last wrote about GameStop (NYSE:GME) stock earlier this month, I said it was “game over”, after the epic short squeeze that sent it to prices topping $483 per share. But, given its recent “Reddit Rebound,” it’s clear I spoke too soon. After cratering back to double-digit price levels, shares in the video game retail have bounced back massively, cracking the triple-digits once again.

GME stock
GME stock

Source: rblfmr/Shutterstock.com

That’s been fantastic enough for those betting on a second round of madness. And, it may not be over just yet. With one r/WallStreetBets (WSB) subreddit laying out a plan for the mother of all short squeezes, bears could be in for a world of hurt once again.

Or will they? With their success of beating Wall Street at its own game, this rag tag team of retail investors still looks like a formidable competitor. But, we’ll find out in the coming days whether their second run at sending this stock to unsustainable levels is as successful as the first.

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So, what does that mean for those on the sidelines, looking at this situation as an opportunity for quick profits? Look elsewhere. Wall Street may have lost the first round. But, expect them to be prepared for the second one.

What Could Fuel Another Parabolic Rally in GME Stock?

What’s causing this second round of madness with GameStop shares? News of its CFO, Jim Bell, exiting on March 26 may be partially fueling renewed interest in this meme stock. But, retail investors, looking for another opportunity to bid this up for fun and profit, are likely what’s driving its surge back above $100 per share.

The question on most investor’s minds is, can it continue? That is to say, is this a dead-cat bounce situation, or can the WSB community again take Wall Street short sellers to the cleaners? It’s possible, according to some theories publicized in recent days.

First, of course, is the mother of all short squeezes I mentioned above. This is referring to a proposed “gamma squeeze” on the stock, causing it to soar to six-digit price levels.

The second zany theory? It comes courtesy of Jim Cramer. On Feb 25, the CNBC host (perhaps tongue-in-cheek) theorized a way GameStop could justify its valuation (and perhaps additional moves higher): turn itself into a crypto play. This plan includes selling $1 billion in stock, and investing the proceeds into cryptocurrencies.

Granted, while both of these outside-the-box theories sound fun, I wouldn’t bet on either one happening with GME stock. In fact, although market irrationality can outlast the solvency of short-sellers, any additional gains from here may be limited. At least, in comparison to the short squeeze that made Wall Street history in late January.

Why Wall Street Probably Won’t Get Fooled Twice

The initial short squeeze in Gamestop, along with other heavily-shorted stocks like AMC Entertainment (NYSE:AMC) caught Wall Street by surprise. Yes, the past year has been a tough one for short-sellers, as richly priced stocks like Tesla (NASDAQ:TSLA) continued to make moves higher that vastly outweighed improvements to their fundamentals.

But, those betting against GME and AMC were playing by the old rule book. Shorting companies with bad fundamentals makes sense. But, only if buyers are buying on fundamentals as well. In a market where investors are buying due to online hype, momentum, or simply YOLO? It’s a whole different game.

One that gave average investors (as a collective) an edge against the smart money. But, don’t expect it to happen once more. Wall Street will likely fight back against another onslaught of coordinated buying by Reddit investors. Whether that’s via trading restrictions, as we saw brokerages like Robinhood do at the height of the short-squeeze saga. Or, perhaps Wall Street could pressure Reddit itself to shutter the popular subreddit.

How Wall Street fights back isn’t the point. It’s the fact it’ll likely curb any future short-squeeze sagas any which way it can. With it more a game of predicting the unpredictable, the ability to handicap the situation is limited. We’ll know in the coming days whether this second round has legs, or if it quickly sputters out.

Bottom Line: I Know It’s Tempting, But Stay Away

Taking a gamble on the continued roller-coaster ride that is Gamestop may look tempting. But, from a rational standpoint, it’s not a gamble worth taking. Yes, perhaps Reddit investors could drive a gamma squeeze, sending this stock not only to the moon, but toward Pluto. And yes, maybe Ryan Cohen will employ Cramer’s crypto strategy in his plans to transform the video game retailer.

However, those buying in today are more likely than not getting in too late. With the risk this second round ends before it begins, steer clear of GME stock for now.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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