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GameStop Prices Rocket

Nerds vs. Hedge funds

Never before had so many retail investors, “the little fish” in Wall Street parlance, joined forces to create a market wave that in the intentions of the “degenerates” – ‘degenerates’, as the traders on this forum call themselves on social media – against the “big fish” of American finance, guilty, in their view, of betting against the bottom through the practice of short selling on “decayed” companies with obsolete or outdated businesses.

Why GameStop?

This is how the name GameStop became a symbol. In the era of e-commerce and the success of online games, the famous chain of physical shops where you can buy video games and consoles is in trouble. The pandemic, travel restrictions and forced business closures have done the rest.

So while the company’s management is trying to find a way out of the impasse and reorganise the business, ‘the strong hands of Wall Street’ have found a way to make money by opening bearish positions on the stock.

Reddit users wanted to atone for this by using the communicative power of the Internet and the prospect of easy profits through simple online trading. In this way, small traders littered the financial forum with messages urging the purchase of Game Stop shares, inciting the ‘battle’ that they, the bullish Gametop traders, were waging against the lords of Wall Street.

"GameStop" or "Gamestonk" ?

A message on Tesla founder Elon Musk’s Twitter profile also contributed to the share price rally. In the message Musk wrote: “Gamestonk!!!”(a reference to one of the most popular financial memes on the net), with a link pointing to the “WallStreetBets” section of the online forum.

In the days that followed, GameStop fever spread to other cheap Wall Street stocks, so much so that several brokers active in the United States imposed a trading halt for retail traders. A measure that has unleashed the wrath of the “small fish” and has transcended the virtual parterre of the stock exchange, ending up by being intertwined with political issues, with Democratic Congresswoman Alexandra Ocasio-Cortez defining the block “unacceptable” for small savers, while hedge funds “remain free to trade the stock as they see fit”.

What expert have to say

Several experts on the well-known American TV channels CNBC and CNN called for the SEC to intervene to calm the waters, while others even called the Federal Reserve into question.

On Wednesday 27 January, at a press conference the Federal Reserve, however, answered few questions. In response to a question linking the huge amount of liquidity injected into the system to the creation of asset bubbles such as GameStop, Powell said he “does not want to comment on day-to-day market activity” but was “aware that financial risks can emerge in periods of broad accommodation, but prefers to address them through so-called macro-prudential tools”.

According to overseas media reports, the price-action on GameStop’s stock brought more than two billion dollars into the pockets of the company’s three largest individual shareholders. But it’s not just small traders looking for easy money, hedge funds, speculators and individual investors who are investing in GameStop.

The company’s shareholder base also includes institutional investors, funds and ETFs that have a mandate to have long-only exposure to the stock and thus benefit directly from the actions of day traders in the Reddit community. Let’s take a look at GameStop’s institutional fund shareholders.

Who are GameStop's shareholders?

Data provided by the Morningstar Direct platform shows the names of GameStop’s major shareholders (as of 31 December 2020). The big names in global asset management are at the top: Fmr (Fidelity Management & Research), BlackRock and Vanguard.

As you can easily guess, the number and weight of GameStop shares in the total assets of these international giants is practically irrelevant and derives from exposures mostly related to passive products or ETFs that replicate the performance of the US mid and small cap segment.

In total, there are 367 investment funds with a long position in GameStop. A very limited number – as reported by the Reuters agency – if compared with the numbers of the closest competitor, Best Buy, on which 2,151 funds are exposed and light years away from the Nasdaq large caps.

In essence, the funds that own GameStop shares are few in number but have a large enough overall position to influence its overall performance. From their perspective, however, the large size of the funds makes share price movements (both up and down) insignificant for the companies that manage them.

Fidelity Management & Research

FMR is the manager of the fund with the largest exposure, the Fidelity Series Intrinsic Opportunities Fund, a product not marketed in Europe with five Morningstar stars and around 13.5 billion assets under management. Fidelity Intrinsic Opportunities owns 9.75% of GameStop’s outstanding shares, a percentage that represents just 0.6% of the fund’s assets.

The iShares Core S&P Small-Cap ETF holds 5.04% of GameStop or 0.12% of its total assets, according to Morningstar. Overall, BlackRock, the world’s largest asset manager, owned about 9.2 million shares of GameStop as of December 31, 2020, spread across several funds.

Hedge funds are a different matter. They were not set up as a form of collective asset management, but rather to take advantage of mismatches in market valuations for speculative purposes. Among these funds, the positions of RC Ventures, Permit Capital and Scion Asset Management stand out.

The latter is the fund managed by the legendary Michael Bury, the trader who first bet on the fall of the American market before the bursting of the subprime mortgage bubble.

RC Venturs, owned by Ryan Cohen, is the company’s second largest shareholder. Cohen,  recently added to GameStop’s board of directors along with partners Alain Attal and James Grube promised revive the business by accelerating the company’s digital transformation. GameStop has promised a greater focus on e-commerce to adapt to the times and regain market leadership.

GameStop: focus on income and financial accounts

The main items in the income statement and balance sheet have been following a downward trend for at least three years now. In 2019 and the first part of 2020, GameStop reported a negative net result and burned cash, driving profitability and profitability ratios such as Roa (return on assets) or Roe (return on equity) into the negative and valuation multiples such as p/e (price/earnings) to near-zero levels.

On 11 January, GameStop announced its Christmas sales results to coincide with the announcement of new board appointments. Despite a 309 per cent increase in online sales, the report shows a 3.1 per cent year-on-year decline in total sales, mainly due to “temporary closures imposed by the pandemic” and, above all, the “store downsizing strategy”.

To date, the online channel accounts for 34% of the company’s total sales and reached $1.35 billion worldwide in 2020. Results for the fourth quarter and full year 2020 will be released in March.

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