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Investors see the positives in buying shorted stocks like GameStop: S3 Partners' Managing Director

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GameStop extended its gains after Monday’s wild moves. Ihor Dusaniwsky, S3 Partners’ Predictive Analytics Managing Director joins Yahoo Finance Live to break down why GameStop is faring exceptionally well this year and discuss whether or not the gaming company will remain profitable amid pandemic.

Video Transcript

[MUSIC PLAYING]

JULIE HYMAN: Ah, those GameStop shares, they continue their march upward, as Myles just mentioned. They were halted for volatility once again. That's what happens when a stock bounces by a certain amount. It gets halted briefly before it can resume trading. And a lot of what has fueled what's going on here is that there are a lot of shorts on GameStop. And so now they are getting squeezed, as the stock goes higher and higher.

To explain a little bit more about what's going on, joining us is Ihor Dusaniwsky. He is S3 Partners Managing Director of Predictive Analysis. Ihor, thank you for being with us. So, you know--

IHOR DUSANIWSKY: Thanks for having me.

JULIE HYMAN: --I think a lot of people are trying to sort of wrap their heads around what's going on here. And, you know, leaving fundamental analysis aside for a moment, can you just sort of tell us the mechanics of what has been happening with GameStop shares over the past months and then days?

IHOR DUSANIWSKY: Sure, well, GameStop is now a $5.5 billion short. It's climbed up to number 12 on the league tables behind the big guys, the FANGs, the Facebooks, Square. So, you know, this is not a small short.

This is not a small short with really a small breadth. This is a big short with a lot of people that are involved in the short side of the market on this. One of the interesting things that's going on is that we're seeing both short covering, because of a short squeeze, and new short selling because people are coming in to try to play a downside move after this momentum, you know, surge in January.

BRIAN SOZZI: Ihor, let's talk about some of those people here. What's going to be the fallout on Wall Street, specifically, in the hedge fund community from the action we have been seeing in a GameStop, in a Bed Bath & Beyond, in a BlackBerry, you name it?

IHOR DUSANIWSKY: Right, these are all big stocks that have just big upside moves and created huge mark-to-market losses for the short sellers. Again, your losses are unlimited on the short side. So you're going in there with a bit of trepidation if you're really shorting a momentum stock.

GameStop has not have been a popular short for a long time-- not been a profitable short for a long time. They were down almost a billion dollars on mark-to-market P&L last year. They were down over $3 billion in mark-to-market losses for the past week.

And, last time I checked the screens this morning, it looks like shorts are down another $1.3 billion in mark-to-market losses just on the open, bringing the year-to-date loss for the stock at around $5.5 billion. So this is, you know, not just your normal hedge or your normal, you know, Alphabet-- alpha-generating bet that is going to help your performance. This is going to knock several points out of your NAV for this quarter.

MYLES UDLAND: And, Ihor, I'm curious, at this point, if there's any sense of how much the dynamics that you're outlining in GME are impacting the market more broadly, if there's a way to see that, if it's too early to see that. How has it maybe changed the shape, if that's the word to use, of the short book that you guys are looking at probably across the market?

IHOR DUSANIWSKY: Yeah, what's interesting is that I did analysis of 2020, and it kind of carries forward to 2021 as well, that most short bets have been losers because, again, this is an upward-trending market. So, out of every-- you know, 57% of all shorted stocks are producing negative P&L.

But what we've seen is more concentration in a lot of the names that, unfortunately, have been big losers. So you've got stocks that are like Tesla, like your GameStop, like GSX where people are losing money hand over fist. So it is affecting-- you know, people are trying to find shorts.

I mean, we've seen short interest in the market go up over a trillion dollars. So it's not like people are running away from doing a short trade. They're still building their positions. It's just that there's not many really good targets to put your money into.

JULIE HYMAN: You know, Ihor, we've been talking for weeks, if not months, now about valuations on the stock market. We've been talking about these areas of froth and bubbly behavior. And this is just yet another example of something that, on the face of it, seems irrational, right? We all can see it. It's all there, right?

IHOR DUSANIWSKY: Yeah, yeah.

JULIE HYMAN: But when does that actually become a turn though? Like when does-- when does a GameStop crash? Is there any way of knowing when and if that is going to happen? And could that happen more broadly among some of these stocks you're talking about?

IHOR DUSANIWSKY: Yeah, we've seen that in a bunch of high-flying stocks. So you've got your Luckin Coffees, your [INAUDIBLE], and everything where you see a really big move in the upside and followed by, you know, a downside slide. So there are a bunch of short investors that do well in the market.

What we're seeing in GameStop is really what-- the most interesting thing is that you've got so many shorts that are being squeezed out. Again, they're down over $5 billion for the year. So there are a lot of guys with really big red numbers that are getting out of the market.

The interesting thing is every damn share that's being returned is being shorted by new short sellers. So there is a line of guys waiting to pick up the sword and say I'm next in. So this has become a kind of like, you know, trench warfare where, you know, the first wave is in, gets destroyed, and then the next wave follows right afterwards. So I think we're seeing that there's a different mentality now in the new shorts and GameStop.

BRIAN SOZZI: Ihor, so, in other words, are investors trying to pick the market top? Is that what we're seeing right now? And really they're getting crushed.

IHOR DUSANIWSKY: On the short side, I don't know if they're-- well, you're going to have a lot of momentum shorts, which are looking to get in at a higher level, like right now at GameStop, hoping that, you know, some of this, you know, exuberance is going to retrace, and they're going to have some nice short-term gains on the downside.

So, yeah, there are a bunch of momentum short players. Again, we have value short players, which are looking at-- you know, they're PVing future earnings. They're looking at dividend returns. They're looking at the value of the stocks. That's a whole different class of short sellers.

Right now, just like you have a whole different class of long buyers, the momentum long buyers, you have these short sellers that are looking for exuberant stocks, kind of way over their skis, and saying, OK, you know what? I don't care whether this company is profitable or not. Technically, I see that there should be a return to normalcy, and I'm shorting in order to catch that return.

JULIE HYMAN: Ihor, how does this end?

IHOR DUSANIWSKY: Oh, you know, it's kind of-- it's hard to say. This is like Tesla. Does it return? Does it fall back down to historical levels? It didn't happen in Tesla. It might happen-- it might be the same thing in GameStop, or it might not.

But what we are seeing is a strong conviction by new short Sellers that they are looking for the stock to drop significantly. And, again, there's a lot of value players in there that are still holding on, even with all the big red numbers, and they're looking for the stock to drop significantly. So you've got a kind of battle between the momentum longs and momentum shorts. And I really don't know who's going to win, but, if the shorts start covering en masses, you're going to see a turbocharged price move in GameStop just because you're going to have the long buyers and the short buy to covers pushing the stock price up.

JULIE HYMAN: Yeah, there's that old market aphorism. Trees don't grow to the sky, but--

IHOR DUSANIWSKY: Right.

JULIE HYMAN: --they kind of are right now. Ihor, thank you for being here. Ihor Dusaniwsky of S3 Partners, thank you so much for making some sense of it, what sense there is to be had--

IHOR DUSANIWSKY: Exactly.

JULIE HYMAN: --of the news that we have been seeing. I appreciate it.