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How Reddit Sent GameStop Up 2,800% – And 7 Stocks That Could Be Next

“Greetings, fellow autists,” a post on WallStreetBets, a forum on Reddit, might start. In three short weeks, the popular subreddit has gone from a dark corner of the internet to Wall Street’s newest kingmaker. As Redditors sent GameStop (NYSE:GME) stock shooting up 2,800%, members gleefully posted screenshots of turning $400 call options into seven-digit gains.

As traditional investors continue to watch GME stock shoot to $150 (and then drop back down again), many have shaken their heads in disbelief. Others decided to try their luck at the Wall Street casino, buying up over a million put and call options in the hopes of repeating early investor performance. So, how did we get here, and what stocks could be next?

Core to GameStop’s massive rise was a short-squeeze, a case where rising stock prices force short sellers to cover their positions (i.e., become buyers). Investors also magnified gains through delta hedging — a scenario where market makers cover their positions by buying the underlying asset.

Long before GameStop showed up on any Redditor’s radar though, the company was a short seller’s dream. Sales had slipped 22% from a year earlier, and shares of GME had lost three-quarters of their value from 2019. Short interest — the number of shares sold short — stood at a whopping 95% on Dec. 30, 2019. And that’s the percent of the total shares. The figure stood even higher relative to GME’s free float.

Then, as the popular Sony (NYSE:SNE) PS5 and Microsoft (NASDAQ:MSFT) Xbox Series X’s gained traction, GameStop’s shares began to rise, creating a self-fulfilling cycle drove shares ever-higher. With only buyers (and no sellers) in the market, GameStop’s stock could only go up.

Having Fun, Reddit Style

In a world where one utterance by a well-known analyst can influence the 401ks of millions, Wall Street has wielded its power with the grace of a hippopotamus. Gone are the free-wheeling days of Michael Milken and company — today, Wall Street research reads more like legal briefs. Meanwhile, with its jocular (and often offensive) tone, contributors on WallStreetBets does the unthinkable: giving certainty — no matter sometimes how wrong — to the world of investing. In other words, they looked to make investing obnoxiously fun again.

Such investing style isn’t without its downsides. For every post about winning big, many more write about losing their life savings to speculation. And thin-skinned investors need not apply — on a site that describes itself “Like 4chan found a Bloomberg Terminal,” rules of standard human engagement don’t apply.

But YOLO investing does have its upside: when you win, you can win big. Chosen correctly, out-of-the-money calls on failing companies can make their owners overnight millionaires.

Finding the Next GameStop

Finding the next short squeeze requires four essential ingredients:

  1. High short interest.
  2. An active options market.
  3. Rising investor interest.
  4. A small enough size to grow 1,000% or more.

Generally, these companies look much like GameStop — weak, struggling, and heading down to zero. But in finance, short squeezes happen more often than people like to admit. Sears Holdings (OTCMKTS:SHLDQ), for instance, saw its shares jump at least 100% seven times since 2007. In 2019 shares even managed a 650% gain before falling back to pennies.

With options trading becoming increasingly common, the Reddit rollercoaster will only get more important. So, to prepare you for the next ride, here are seven stocks that could turn into the next GameStop.

  • Bed Bath & Beyond (NASDAQ:BBBY)
  • Ligand Pharmaceuticals (NASDAQ:LGND)
  • FuboTV (NYSE:FUBO)
  • Macerich (NYSE:MAC)
  • SunPower (NASDAQ:SPWR)
  • Carparts.com (NASDAQ:PRTS)
  • Petmed Express (NASDAQ:PETS)

7 Stocks that Could Be the Next GameStop: Bed Bath & Beyond (BBBY)

Bed, Bath & Beyond (BBBY) storefront with trees in front
Source: Shutterstock

  • Short Interest Percent of Float: 63%
  • Market Capitalization: $3.6 Billion
  • 6-Month Return: 209%

For years, Bed Bath & Beyond has seen its profits melt away as customers shifted to online purchasing. Operating income fell from a healthy $1.4 billion in 2016 to negative $700 million in 2020 And that was before the coronavirus pandemic. In time, shares collapsed from over $50 to under $4.

Since then, BBBY stock has gone on an inexplicable tear. Shares are up over 800% to $32, even as analysts expect revenues to drop 18% in 2021. With a price-to-sales ratio of just 0.44, BBBY shares still have room to “melt-up.” Don’t pick this company as a long-term winner, but talented options traders might yet win.

Ligand Pharmaceuticals (LGND)

a scientist with protective equipment and microscope in a lab
Source: luchschenF / Shutterstock.com

  • Short Interest Percent: 62%
  • Market Capitalization: $2.3 billion
  • 6-Month Return: 19%

Ligand Pharmaceuticals is the most shorted U.S. biotech company. But with its tiny market cap, the company could still surprise short sellers with unexpected good news.

Ligand shares several similarities to GameStop. Firstly, Andrew Left’s Citron Research has targeted the company. In 2019, the famed short-seller put a $35 price target on the biotech firm. Secondly, the investors have priced the company’s shares with the expectation of revenue declines. 75% of its base business royalties come from four drugs, which will lose patent exclusivity starting 2023. And finally, Ligand has potential aces up its sleeve. The company has multiple drugs in its pipeline, and a successful launch of any could set short-sellers closing their positions.

It’s usual for biotech companies to spike on successful clinical trials. But when 64% of your shares are sold short, the potential for gains is far greater.

FuboTV (FUBO)

A picture of a FuboTV (FUBO) logo on a smart phone against a computer keyboard.
Source: Lori Butcher/ShutterStock.com

  • Short Interest Percent: 61%
  • Market Capitalization: $2.5 billion
  • 6-Month Return: 316%

FuboTV had the misfortune of developing a sports streaming platform during the peak of platform streaming wars. By June 2019, the tiny streaming company’s shares had fallen from its $540 split-adjusted IPO price to just $3.

But then the coronavirus pandemic hit. As people began to seek Netflix (NASDAQ:NFLX) alternatives, fuboTV saw revenues climb from zero to over $60 million per quarter. Analysts now expect the company to rake in $750 million by 2022. Shares have since spiked back to $41 — not as high as its IPO price, but a respectable gain, nonetheless.

Bears haven’t yet received the memo. With 34 million shares sold short, fuboTV is the most shorted growth stock in the world. Long-term investors should keep watch. Even with the well-documented problems at fuboTV, the company could make for a phenomenal long-term bet.

Macerich (MAC)

  • Short Interest Percent: 58%
  • Market Capitalization: $2.1 billion
  • 6-Month Return: 118%

There are plenty of reasons to hate Macerich, a real estate investment trust (REIT) that focuses on shopping malls. Like GameStop, Macerich has seen revenues collapse as people have shifted buying habits online. And just like GME, the company was caught flat-footed by the coronavirus pandemic

But fleeing investors sent shares of MAC down too far. After bottoming out at $4.50, MAC stock has since rebounded over 200% to $18. And shares still look relatively cheap — the REIT trades at 0.9 times the estimated book value. Rival Kimco Realty (NYSE:KIM) and Tanger Factory Outlets (NYSE:SKT), meanwhile, trade at 1.3 and 3.6 times, respectively.

There’s no guarantee that MAC will survive long term. But with short interest at over 50% of floated shares, a sudden improvement in mall traffic could send shares shooting up as shorts cover their positions. Short sellers beware; the value of MAC’s underlying assets might prove their worth yet.

SunPower (SPWR)

Source: via SunPower

  • Short Interest Percent: 54%
  • Market Capitalization: $8 billion
  • 6-Month Return: 642%

SunPower has confounded nay-sayers this year. Since the start of the coronavirus pandemic, shares of the residential solar panel maker has rocketed 1,600%, beating even Tesla’s (NASDAQ:TSLA) stunning gains. It’s not hard to see why investors initially priced SPWR to fail. With a gross margin of just 13%-17%, the company has long fought tooth-and-nail in the low-profit world of PV cells and solar panels.

Since March, however, the rising price of oil has put new pressure on finding renewable energy sources. Adding in a U.S. presidential administration looking toward green energy, you get a potent mix that could squeeze shorts even further.

Carparts.com (PRTS)

ROOT Stock - Man holding car insurance
Source: Jirsak / Shutterstock.com

  • Short Interest Percent: 40%
  • Market Capitalization: $650 million
  • 6-Month Return: 8%

Carparts.com, an online retailer of automotive aftermarket parts, has emerged as a clear winner from the coronavirus pandemic. Once at risk of delisting, shares now trade north of $12.

The company could still surprise even further. In September, the company revealed it had broken even on operating income, reversing years of mismanaged decline. Shares also trade for relatively cheap, particularly for a company starting from such a low base. Its 1.3x price sits close to rivals LKQ (NASDAQ:LKQ) and Advance Auto Parts (NYSE:AAP).

While the company is still a long way from rivaling larger nationwide retailers, it’s the high level of short interest and minuscule market capitalization make it a potential short squeeze candidate.

Petmed Express (PETS)

Source: II.studio / Shutterstock.com

  • Short Interest Percent: 34%
  • Market Capitalization: $600 Million
  • 6-Month Return: 19%

Closing out the list is Petmed Express, owner of 1-800-PetMeds. Even as rivals like Chewy (NYSE:CHWY) and PetCo (NASDAQ:WOOF) have stolen the spotlight, Petmed Express has quietly grown its business. Sales in the most recent quarter rose 14% from a year earlier. It’s hardly surprising then that its share price has doubled from its 2019 lows.

What’s surprising, however, is investor bearishness on this growing e-commerce operation. Shares of the company trade for just 12 times EV-to-EBITDA — half of what’s typical for profitable e-commerce companies. And with a third of its shares sold short, it seems investors are mistaking 1800PetMeds.com as an order-by-phone retailer instead of an online pharmacy.

Long-term investors might lose out — PETS will likely underperform its faster-growing e-commerce peers. But the company could still generate massive returns for well-timed options holders. Short-sellers beware; Reddit might yet blow this company up.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/7-next-gamestop-stocks-gme-stock/.

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