Investors hoping that logic will prevail when it comes to GameStop (NYSE:GME) stock should prepare to be disappointed.
If 2021 has proven anything about the shares, it is that they won’t be stopped, and all of the arguments about its fundamentals are worthless. I’ve made several of those arguments myself. But the collective might of GameStop’s backers continually proves fundamental analysis wrong.
I’m not suggesting that all investors run out and establish a bullish position in GME stock. Rather, I’m suggesting that those who are considering betting against it should not do so. Because despite GameStop’s financial results, 2021 has shown that betting against GME stock is very costly.
Sustained Losses
If a pattern repeats enough times, it is eventually taken as a fact. Based on that logic, it is a fact that betting against GameStop will be costly. That is, of course, a hyperbolic statement, but it is clearly based on an established pattern.
A Jan. 29 CNBC article noted that short-selling hedge funds had suffered $20 billion of losses by betting against GME stock. On Jan. 29 alone, those short sellers suffered a collective $8 billion loss
Although short sellers’ total losses have declined since then, the owners of GME stock are still way ahead of the short sellers.
By March, short sellers’ collective losses had fallen to $11 billion. And by the third week of July, those losses had again declined, reaching a cumulative $6.3 billion.
So moderate investors should clearly not bet against GameStop. And the most risk-tolerant investors are already betting on GameStop, largely because they want to collectively beat the hedge funds.
The collective power of those retail investors may soon lead GME stock even higher, since the improbable run of GameStop is not over.
A Potential Member of the S&P 500
GameStop was last a member of the S&P 500 in 2016. But there are now rumblings that it could become a member of the prominent index again. Some are betting that if that does happen, GME stock will surely rise above its current levels.
An anonymous group of people will decide whether to include GME stock in the index. The logic behind their decision-making process will not be disclosed to the public.
From an objective standpoint, GameStop does face some challenges. Companies on the index must have been profitable during their most recent reported quarter. Moreover, their cumulative bottom lines over their four most recent reported quarters must also be positive according to The Wall Street Journal.
The likelihood of GameStop passing those tests is low, The Journal stated. “GameStop reported a loss for the first quarter of the year, as well as for the first three quarters of 2020. Because GameStop’s loss for 2020 was significant, it is unlikely it will pass the requirement that the sum of its past four quarters’ earnings be positive, no matter what its results wind up being for the second quarter,” the newspaper explained.
Nevertheless, the market capitalization of GME stock is now three times as high as the members of the S&P 500 with the lowest market capitalizations. If GameStop’s fiscal second-quarter earnings, due to be reported on Sept. 8, come in above analysts’ average estimate, enabling it to meet the criteria for inclusion in the S&P 500, it could be added to the index.
Never say never in 2021. That’s what GameStop has taught investors. If GameStop does defy expectations and get placed in the S&P 500, GME stock will almost certainly rise. Even if GameStop does not enter the index, its meteoric and improbable rise w3ill be difficult to stop.
Perhaps now is the time for more risk-averse investors to take a bullish position in GameStop.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
