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Why GameStop Beat the Market by 3-to-1 This Week

By Rich Duprey – Jul 24, 2021 at 11:57AM

Key Points

  • Trading in GameStop shares is not based on company-specific news, but rather social media chatter.
  • Wall Street analysts still like its potential even if they can no longer determine its valuation.
  • Shares are going to be volatile until the meme stock investing trend runs its course.

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The video game retailer continues to benefit from its meme stock status.

What happened

Shares of GameStop (GME 3.46%) rose 6.7% this week, handily outperforming the broad market index, which was up less than 2% for the five-day period. 

It was a performance the video game retailer replicated all week long, especially to kick off the week after the market had plunged over 700 points for the day. GameStop, however, was able to rally higher, ending Monday's trading up 2.6%.

The stock was lifted higher as the market roared back to recover all the ground it lost and then some, but GameStop also gave back a portion of its gains before ending the week on a high note.

While it ended nearly 7% higher for the week, it still finished almost 8% below its weekly high.

Cheering fans in a crowded stadium.

Image source: Getty Images.

So what

There was no company-specific news that was driving the retailer's stock higher, but that's not essential for so-called meme stocks like GameStop, which thrive more on internet chatroom discussions and short seller activity.

While GameStop was the original meme stock retail investors rallied around, and there remains a strong cadre of them maintaining vigilance on its shares, the momentum crowd has moved on to other stocks, most notably theater operator AMC Entertainment (AMC), which in return has embraced its meme stock status.

However, because the valuations of the stocks are no longer based upon the companies' fundamentals, analysts are beginning to drop their coverage of them until they can better assess the business potential. Recently, several stopped covering GameStop.

Now what

Even though Wall Street is backing away from it until cooler heads prevail, a number of analysts actually do like GameStop's potential. Prior to the trading frenzy that broke out earlier this year, there were even buy ratings on its stock as the analysts figured the market was misjudging its chances of turning itself around.

Chairman Ryan Cohen cleaned house at the retailer, installing a new management team and board of directors, all of whom are focused on transitioning the video game retailer into a predominantly online retailer catering to gamers.

Although GameStop is giving its investors free stuff as AMC is, it has used their support to raise enough capital to pay off all its debt and fill its coffers with enough cash to finance its transformation.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

GameStop Stock Quote
GameStop
GME
$27.52 (3.46%) $0.92
AMC Entertainment Holdings Stock Quote
AMC Entertainment Holdings
AMC
$8.17 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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