What happened
Shares of GameStop (GME +3.88%) surged in early trading on Monday, propelled by a document filed with the Securities and Exchange Commission on Friday. There's a big new buyer of the company's stock, and there are a of couple reasons why this could be good for its other shareholders.
As of 11:45 a.m. EDT, GameStop stock was trading about 15% higher. But it could have more room to climb in the coming weeks.
Image source: Getty Images.
So what
Friday's filing disclosed that between Aug. 13 and Aug. 28, RC Ventures purchased 5.8 million shares of GameStop, giving it a 9% stake in the company. RC Ventures' manager is Ryan Cohen, who was a co-founder and CEO of Chewy before Petsmart bought it in 2017 for over $3 billion.
From a business perspective, investors are understandably excited about Cohen's interest in GameStop. In its fiscal first quarter, which ended on May 2, the niche retailer's net sales were down 34% year over year, in part due to the pandemic. But make no mistake: The company was struggling prior to the coronavirus. In 2019, net sales were down 22%, leading to a loss of $5.31 per share. It seems consumers don't have much use for a brick-and-mortar video game middleman anymore -- especially when it has been years since a new console has launched.
As a predominantly in-store retail chain, GameStop recognizes it needs to do better in e-commerce. And perhaps that's where Cohen can lend his expertise. As a founder of an e-commerce company that successfully went head-to-head with large, established players, he will almost certainly have some ideas about how this troubled company could turn things around.
Now what
There's more to the spike in GameStop's stock price than one big investor making a move. It's also one of the market's most heavily shorted stocks -- a whole lot of people are investing in bets that its price will fall. Exact counts vary, but MarketBeat shows 99.62% of shares sold short. Yahoo Finance currently displays 86% short interest of outstanding shares, and 250% of the float. No matter what the exact percentage is, suffice it to say this is a stock with major short interest.
If short traders ever want to move on -- in other words, close their short positions -- they must actually buy shares. Sometimes they may do that voluntarily. Other times, if the stock is rising, a trader's brokerage company can force them to close the short position. Once short traders begin purchasing shares, that can send their prices higher, which can lead to still more traders being compelled to close their short positions, creating a snowball effect known as a short squeeze. While nothing is guaranteed, the higher the level of short interest, the higher the chances that there will eventually be a short squeeze.
By taking a full 9% of the company's shares out of circulation, RC Ventures has made the situation extra ripe for a short squeeze. No doubt GameStop stock is trading higher Monday, at least in part, due to some traders preemptively closing their short positions to get ahead of a potential squeeze.
GameStop is scheduled to report earnings on Sept 9. At that time it's possible we'll hear more about RC Ventures' intentions.
