I want to start off by giving credit where it’s due. While the dramatic rise and subsequent fall (at least for now) had for weeks dominated the global audience, the narrative for GameStop (NYSE:GME) continues to attract attention. Yes, GME stock lost a substantial amount of its luster, with shares a fraction of their peak closing price of just under $350.
Still, we may see more newsworthy items ahead.
Currently, though, the implosion of GME stock has led to much finger wagging. As various experts and Wall Street veterans have stated, euphoric sentiment of emotionally evocative investments rarely ends well. And again, at least for the time being, the experts are right. If you bought anywhere near triple-digit territory, let alone deep inside it, you’re feeling the pain.
Naturally, the arrival of red ink when for a brief moment everything was in the black sent many people on social media into a frenzy. Perhaps we may be witnessing the five stages of grief before our very eyes: denial, anger, bargaining, depression and finally, acceptance.
With GME stock, I’d say we’re in the bargaining phase. At first, there was broad denial that the hedge funds could sustain their deliberately bearish momentum. Then came anger, with social media forums insisting that the GameStop faithful stop selling, with a choice word in between.
A Conspiracy Theory
Recently, though, a conspiracy theory emerged regarding a so-called short ladder attack. From what I can surmise, this is a ploy where hedge funds sell GME stock to each other to give the appearance of volatility, thereby encouraging the faithful to exit while they still can.
This to me sounds like the aforementioned bargaining phase. The harsh reality is that someone had to sell those shares and that goes back to weakhanded GameStop shareholders. Apparently, the faithful were faithless.
Still, we should give credit to the early initiators of this trade. They found an opportunity in the cesspool of Wall Street and exploited it to maximum advantage. Better yet, they made hedge funds think twice about extreme speculation.
Don’t Let the Sideshow Fool You About GME Stock
I may be one of the few contributors at InvestorPlace that owns GME stock. Thus, there’s some interest, at least internally about what I think about this whole craziness.
Let me start with this before going any further. I am hardly what you might call “diamond hands,” or people who hold on to their holdings despite the rising pressure of a scarlet-plunged portfolio. Oh yeah, I did see a lot of red ink. However, I got in on this ship at a much earlier paradigm so I’m more curious about this ramp up than anything else.
And this paradigm is actually what I’d like to talk about, which is completely divorced from short ladder attacks or just ladders in general. You see, we have conveniently forgotten that it wasn’t Reddit but one of the most famous short-sellers (ironically enough) that championed the bullish case for GME stock.
In 2019, Michael Burry of The Big Short fame stated that he was long GameStop. As part of my pros and cons analysis of GME stock, I stated the following:
If we do have a recession, GameStop stock levers a critical advantage. In an economic downturn, customers will cut unnecessary expenditures. I’d call video game subscriptions unnecessary. But used physical games for half their new sticker price or better? That would fly very well, especially because recessions incentivize cheap entertainment.
Personally, I believe the cheap entertainment incentive rings true more than ever. We must not forget that not everybody in America is a millionaire. People are looking for any respite and video games are a natural source, especially with the disruption to the box office.
GameStop Is a Wager on a Return to Normalcy
Of course, the main problem with GME stock is that the underlying business is a flailing retailer primarily located in strip malls. Under the new normal, this is about as relevant as preparing my articles on a typewriter and submitting them via post mail.
However, it’s impossible to keep Americans down. In the same way that investors are now betting on embattled industries like airliners and cruise ships, the same respect should be extended to GameStop if we’re following the same logic.
Honestly, what would be safer? Being stuck in an airplane for 10-plus hours with the possibly infected or being in a store browsing the latest games and accessories? Bottom line, if you feel uncomfortable at a retail store, you can always leave.
But I don’t think they’ll leave. Indeed, the data suggests otherwise. Between April 2020 to December last year, GME stock shared a 63% correlation coefficient with the Consumer Sentiment index. While that’s not the strongest correlation, it’s not something you can ignore.
Moreover, the personal saving rate is still very elevated. This suggests that consumers will not pay unnecessary premiums for their purchases. In my opinion, this bodes negatively for new and subscription-based video game sales but augurs well for cheap secondhand games.
Be Careful Above All Else
Still, if you’re looking to get in, I’d wait for shares to come down – and they very well might. Despite my bullishness on GME stock, remember, I got in at single digits. At high double digits, we’re talking about a different paradigm.
On the date of publication, Josh Enomoto held a long position in GME.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.