U.S. Markets closed

How Game Reseller GameStop Zapped Short Sellers

Dee Gill

It’s been a rough year for short sellers all around, but perhaps no company has so consistently baffled its doubters as GameStop (GME). Not only has its share price nearly doubled since February, its share price trajectory gave short sellers very few opportunities to cover their pessimistic bets along the way. And boy, there were a lot of pessimists.

GME Chart

NYSE:GME data by YCharts

Between the end of February and mid June, short sellers held between 31% and 38% of GameStop’s public float, according to NASDAQ records. That was high enough at times to put it among the most shorted shares in the market.

GameStop’s share price, however, recorded only one significant decline during that period; a 19% drop in the week of May 20. The share price was climbing again by the end of the month. The week of May 15 – the optimal time to be holding shares short to cash in on that decline – happens to have been the low point of short holdings for the period.

While other heavily shorted companies have surprised the market with even better share price gains, many of those gave short holders more opportunities to make money anyway. Consider the same-period share price movements for Zillow (NASDAQ:Z) and Questcor Pharmaceuticals (QCOR), two of the most heavily shorted stocks this year.

Z Chart

NASDAQ:Z data by YCharts

Short sellers holding shares at the end of July in both Zillow and Questcor were badly burned, taking up to 30% losses in some cases. But shorters made money in Questcor between late March and mid-April, and again between mid-May and mid-June. Investors holding Zillow short in May are looking pretty smart now too. They had a couple of steep declines over a few trading days to exploit.

It’s easy to see why short sellers might target GameStop, a company that sells video games and consoles and bricks-and-mortar stores in an age of online downloads and social media. Its sales have declined for a couple of years now. Although the company has done well with a customer loyalty program and its own online presence, perhaps shares trading at a forward PE ratio of 15 seem a bit rich for the situation.

GME Forward PE Ratio Chart

GME Forward PE Ratio data by YCharts

Enthusiasm for betting against GameStop’s success has waned, though. GameStop shorters have fallen away steadily since the end of June. Short shares are now about 17.2% of float.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.