Humans love Underdogs, at least most do. We love the fact that how-so-ever limited it might be, for once the weak stood up to the strong and gave the latter a bloody nose to nurse and remember for a long time.
While this may sound pretty good a script for movies, in the world of shares, stocks and money, it can sometimes play havoc, especially when big monies (and bigger egos) go down the drain.
Something similar is the case with GameStop and its stock rating on varied platforms in the US.
For an aging ship buffeted by super-strong winds and choppy waters, GameStop was for quite a while feeling the heat of digitization of its most important of products, computer-games and electronic games. Being the leading dealer of products from the stables of Atari 2600, Nintendo, Xbox Live and PlayStation besides its own inhouse products that came to it from its myriad acquisitions, it was the numero-uno in the field till it was hit by digitization which first took away its clients who preferred procuring their products thru e-commerce sites which delivered everything from software discs to consoles and peripherals home instead of folks having to travel any distance to get these. In time, digitization only hastened its collapse with the spread of digital games which could be procured online (without the need for any physical paraphernalia) and played either on PCs or mobile phones. Pushing it further were companies including Sony whose physical consoles came with built-in digital features completely obviating the need to buy anything more.
While all this was going on, the company saw a sustained erosion of its marketcap which went as low as USD 2.00 on a 52-week low somewhere in 2019-2020. Hedge funds with deep pockets and always the favourites with those in the right positions, including Melvin Capital sold heavily with the understanding that nothing could save the company from imminent collapse in the days to come.
While this was all going on two events in particular caused its marketcaps fortunes to change drastically. One, its ex-CEO and Investor Ryn Cohen & others ended up buying 9 million shares for USD 76 mn taking the value per share to USD 8. The other were murmurs on a reddit platform that the company had “hidden” assets that could still bring about a turnaround! The “hidden” assets could be the liquid USD 480 million, and a feeling that the pandemic rocking the US economy and households could bring higher sales of games given that locked-out folks had little else to do but play games on their consoles.
Be it concerted efforts or pure luck, the reddit gang (and some deep pockets on their side of the fence) quickly lapped up large number of GameStop’s shares based on the above predictions. Buying in quick succession, the stock’s value spiralled up to USD 480.00 on 29th January 2021- a 12000% rise from a low of USD 2.00 a year back.
Overheated the stocks were despite which the markets did little to control the swing preferring trading platforms to put the brakes which they did but to no great advantage. In the end (though the end is yet to come!) the bourse’s darling with deep pockets including hedge funds like Melvin Capital lost heavily (the latter incidentally lost close to USD 5 billion) in short-buying to cover their position.
The story though far from over does show that the best and biggest (in this case, the US stock markets that boast of the world’s most sophisticated system of stock trading and investor protection) don’t really stand a chance when they are up against a decidedly dedicated bunch with the right information and intent. For once, and in a long time, the stock markets where completely outwitted, outsmarted and outfoxed by the little guys with brains! As for the hedge funds, after the carnage on the markets, the certainly don’t seem to have a hedge to hide behind.