Will GameStop Stock Rally Again?

Despite the fuss that was created by the GameStop stock rally, there could likely be further gains in the coming months

GameStop stock dominated the headlines in early-2021 with the price opening the year at $19.00 and soaring to a high of $483 in late-January. The gaming retailer saw a huge short squeeze rally that captivated the financial media for weeks before the bubble burst. After dropping to a low near $38.00, the price has bounced back to $200, but could drift in the near-term.

Hedge fund idiocy meets retail swarm

The GameStop saga seems a bit far-fetched because hedge funds tend to risk 2% or 5% per investment idea and the idea that Melvin Capital risked 50% of their capital going short into a multi-year low sounds reckless.

It’s a classic example of the psychological pitfalls that can hurt investors of any level. GameStop was still trading and, although it had a high level of debt and its stores locked down, this was a hugely aggressive move.

The media got to play out a David vs Goliath, Main St. vs Wall Street pantomime and retail investors were blamed for shaking the roots of the system but these events happen when there are imbalances. When you short more stock than currently exists in the market then you better have a near 100% chance of success. The story with GameStop is that they didn’t.

Chewy co-founder Ryan Cohen had moved into the company in January with board seats and was looking to capitalize on the recent struggles by pushing the company into an e-commerce model. This is new information coming to the table and it’s a time to reconsider any short thesis. This was not the case in GME and a perfect storm saw the stock blast higher.

GameStop is risky but not overvalued

At $200, GameStop stock still only trades at 2.73x its annual sales. This is in contrast to Tesla, which trades at 20x sales despite a recent pullback. Of course this is a crude example, but GameStop is not trading at an extreme valuation and if the new board can deliver an immediate plan for a sales boost that increases free cash flow then this could see investors move in.

The current 26% short float has removed the short squeeze risk after the ridiculous peak near 136%, but there is still potential for a rally now that the company is a household name. The financial media are trying to portray GME as a “meme stock” that got pumped on gamesmanship but this is a discredit to the company. It’s simply a stock that was beaten down by the closure of retail outlets and needs a new turnaround plan.

The ball is now in Cohen’s court and although the shot clock is winding down, there is still plenty of time for a three point score.

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