If you’ve invested in video game retailer GameStop (NYSE:GME) in hopes of a 2021-style epic short squeeze, don’t get your hopes up. It’s unlikely to happen in the near future. Moreover, if you’re holding GME stock because you want GameStop’s chief executive to engineer a turnaround for the company, you should probably temper your expectations.
Sure, the meme-stock mob gave GameStop’s market capitalization and share price a boost in 2021. This year, however, the short-squeeze crowd seems to have lost its mojo.
Now, GameStop’s investors are left holding shares of an unprofitable business. Maybe, after GME stock’s sharp decline since June, the bulls are pinning their hopes on a miraculous recovery. Most likely, however, the best policy is to move on to more promising opportunities.
Will a Ban on Naked Short Selling Rescue GME Stock?
I won’t call anyone out in particular, as I’m not here to embarrass people. Yet, I’ve seen amateur stock traders on social media circulating a rumor without merit. So, I feel the need to address this issue now.
Let’s talk about the practice of “naked” (i.e., uncovered) short selling for a moment. It typically involves short-selling a stock without borrowing, or at least arranging to borrow, the shorted stock from a broker in a timely manner. In some cases, the short-sold shares don’t even exist.
Don’t listen to any rumors that the Securities and Exchange Commission (SEC) is going to ban naked short selling in 2023 or 2024. The practice of naked short selling is already illegal in the U.S.
Yet, this illegal practice has evidently still happened, as Harry Turner, founder of The Sovereign Investor, explains:
“The most infamous recent example of naked short selling was the GameStop saga in 2021, where traders reportedly sold short around 140% of its shares… This meant that 40% more shares were sold short than existed, which is only possible with ‘phantom’ sales from naked short selling.”
Perhaps the false rumors started because the SEC is introducing new regulations to help enhance transparency in legal (non-naked) short selling. None of this adds up to an imminent, epic short squeeze in GME stock, however.
GameStop CEO’s Leadership Ability Called Into Question
Moving on to the topic of leadership, Ryan Cohen replaced Matthew Furlong as GameStop’s CEO not long ago. Cohen founded Chewy (NYSE:CHWY), a pet product e-commerce business that doesn’t bear a close resemblance to GameStop.
Apparently, Cohen is into cost-cutting. He reportedly sent an e-mail to some GameStop employees declaring, “Extreme frugality is required,” and, “Every expense at the company must be scrutinized under a microscope and all waste eliminated.”
One can only imagine the negative impact that “extreme frugality” might have on the quality of GameStop’s customer service. Furthermore, Cohen’s draconian attitude will almost certain drag on the company’s employee morale.
My commentary might sound harsh, but it’s mild compared to what Wedbush analysts Michael Pachter and Nick McKay had to say about Cohen. InvestorPlace contributor Chris MacDonald recently mentioned that Cohen is GameStop’s top individual shareholder via RC Ventures and holds approximately 12.1% of the company’s shares.
From this, Pachter and McKay draw a scathing conclusion about Cohen’s worthiness to lead GameStop. “The appointment of the controlling shareholder reflects the difficulty GameStop has had in attracting competent executives,” the Wedbush analysts warned.
Plus, Cohen was elected to GameStop’s chief executive position by the company’s board of directors. That board (per Seeking Alpha) mainly consisted of Cohen’s colleagues from Chewy. This, Pachter and McKay claim, suggests that Cohen’s “appointment was more of a coronation by his believers.”
These are notable points that GameStop’s hardcore fans should consider. They can also heed the Wedbush analysts’ cautionary note about Cohen and, ultimately, about GME stock. “With no experienced retail executives to advise him, we suspect that GameStop will continue its path to oblivion,” Pachter and McKay ominously predicted.
GME Stock Could Actually Be Headed for Zero
In the previously cited article, MacDonald suggested that GME stock is headed for zero. This is actually possible, in my opinion. Also, the ban on naked short selling won’t likely help GameStop’s bag-holding investors recover their losses.
Additionally, the Wedbush analysts’ objections should be duly noted. As they pointed out, “Cohen has no significant experience managing a physical retailer.” The point is, Cohen just might not be the right pick for GameStop’s chief executive role. So, it’s wise for investors to stay away from GME stock as its path toward zero is relentless and probably unstoppable.
On the date of publication, David Moadel 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.