GameStop Corp. (NYSE:GME) had a meteoric rise in late January due to a horde of retail investors piling into the stock.
GameStop’s surge was a fascinating example of a “short squeeze.” Simply put, when traders “short” a stock, they borrow shares of the stock they think will fall over a given timeframe. If the stock drops, they give back the shares and collect the difference between the initial borrowed price and the actual sale price.
GameStop’s dramatic stock turnaround began in Reddit’s online chat forum known as r/WallStreetBets nearly two years ago, according to Bloomberg. Folks started chatting about what they perceived as GameStop’s undervaluation and strong cash position — a view not held by seasoned Wall Street analysts.
Then other contrarian investors, including Michael Burry, who was portrayed in the 2015 film The Big Short for his role in predicting and profiting from the subprime mortgage crisis, began taking long positions in GameStop.
Another industry report warned shares in GameStop were dangerously shorted. At one point, according to CNBC, more than 138% of the company’s tradable shares had been borrowed and sold short. This made the stock the most shorted on the U.S. stock market, according to FactSet.
In a January Market360 article, I explained why I would not recommend GME stock to my subscribers. The reality was the fundamentals were weak, and the stock was simply too volatile to pass my fundamental screenings.
Well, GME released earnings this week, and its results were not pretty.
After the market closed on Tuesday, GameStop, Inc. released fourth-quarter and full-year earnings results that fell short of analysts’ expectations. During the fourth quarter, revenue fell 3.3% year-over-year to $2.12 billion, below consensus estimates of a 2.2% increase to $2.24 billion. Earnings per share rose 5.5% YOY to $1.34 but was still below analysts’ estimates for $1.46, so GME posted an 8.2% earnings miss.
GME stock dropped 33.8% after its weak fundamentals were put on center stage. Interestingly, the stock did rebound sharply on Thursday, but it ultimately ended the week lower.
The truth of the matter is GME a low-quality, volatile stock, and one I wouldn’t touch with a 10-foot pole. I look for stocks with superior fundamentals. In order words, stocks with strong earnings and sales growth, which also describes my Growth Investor Buy Lists stocks to a “T.”
My average Growth Investor stock has had its earnings revised 16.7% higher in the past three months. Typically, positive analyst revisions precede future earnings surprises. In addition, my average stock is characterized by 66.1% annual sales growth and 276.4% earnings growth, so I am expecting a spectacular first-quarter earnings announcement season for my Growth Investor stocks, with my companies set to post wave-after-wave of positive earnings results.
As always, my Growth Investor Buy Lists are “locked and loaded” for the coming earnings season. If you want your portfolio to be, too, now is an especially great time to join Growth Investor. I just released four new stocks in my Growth Investor April Monthly Issue yesterday — two High-Growth stocks and two Elite Dividend Payers. Every stock earns an A-rating in Portfolio Grader, and my Elite Dividend Payers also hold an A-rating in Dividend Grader, making them rare AA-rated stocks.
On the date of publication, Louis Navellier did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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