GameStop’s business brisk amid stock price madness, Wall Street hedge fund closures

For the last 2½ weeks, a band of small investors has been bidding up GameStop shares in a bid to punish the hedge fund titans who had bet on the retailer’s demise. The effort was shockingly successful: The stock rose more than 17 times by the market’s close on Wednesday.

But that support began to crumble Thursday as such brokerages as TD Ameritrade, Charles Schwab, E-Trade, Interactive Brokers, and most notably, Robinhood, limited access to trading in GameStop shares, causing its stock to plummet 44% just on Thursday, from $347 to $193 a share. The stock is still up 927% for the year.

The explosive rise had led some investors to crow about whacking Wall Street and landing a blow for the little person.

“It’s a beautiful thing to see,” said One_Guy_One_Jar on Reddit’s profanity-filled r/wallstreetbets, the movement’s main hangout. “I don’t think of my purchase as an investment, but as putting my own skin in the game” to denounce a rigged system.

Critics, however, called the rapid rise a case of market manipulation that should be investigated by the U.S. Securities and Exchange Commission. The SEC said Wednesday that it is monitoring the market’s volatility and “working with our fellow regulators to assess the situation.” State regulators have also expressed interest.

As the bubble deflated, a furor grew over the steps some brokers took to halt sales. Lawmakers ranging from U.S. Sen. Ted Cruz, the conservative Republican from Texas, to left-leaning U.S. Rep. Alexandria Ocasio-Cortez (D., N.Y.) blasted Robinhood, in particular — a firm that has sold itself as an investment tool for the masses. Later Thursday, the brokerage partially reversed course, saying it would allow “limited” buying on Friday.

GameStop, the Grapevine, Texas, public company at the center of this exuberance, hardly seems to be worth all the attention.

Founded 37 years ago when the Macintosh was a hot new product, GameStop, which sells video games, gaming consoles, and other home entertainment products, has benefited somewhat from the pandemic-driven increase in demand for in-home activities. It has also aggressively boosted online sales.

But short-sellers — those betting that the stock price would fall — targeted the company.

GameStop has been seeking a rebound. It cut its operating loss to $399 million in 2019, almost half the 2018 losses of $701 million. Still, the firm continued to lose money last year. GameStop, which had 5,000 stores in 10 countries before the pandemic, has been on a steady track to build its online business and close poorly performing locations.

Ryan Cohen, the founder of online pet food giant Chewy, bought a stake in GameStop last year and joined its board, leading some to expect a turnaround.Same-store sales for the most recent holiday season dropped 3.1% to $1.770 billion for the holiday season, while e-commerce sales rose 309% to $1.35 billion.holidays the nine-week period ended January 2, 2021 compared to the nine-week period ended January 4, 2020. The company reports full fiscal year 2020 results in late March.

The company has been helped by stay-at-home mandates in New Jersey and Pennsylvania that have prompted more folks to take up electronic gaming. The shutdowns have also encouraged enthusiasts to buy — and trade in — popular video and streaming hits such as Call of Duty: Cold War, Marvel’s Spider-Man: Miles Morales, and Hitman 3.

Both Sony’s PlayStation and Microsoft’s Xbox put out new gaming consoles before the holidays, further fueling the trend.

With at least a dozen locations in the Philadelphia area, GameStop has emerged as a major beneficiary of COVID-19 claustrophobia.

At the Cherry Hill Shopping Center store, customers were too busy vanquishing on-screen enemies to track the hourly gyrations of the company’s stock.

“The hit games have been very hard to keep in stock,” said Ricardo Soto, assistant manager at the Cherry Hill Shopping Center store. The corporate office chose to sell popular games and accessories in waves online, to prevent crowds from gathering in stores, he added.

“After the holidays, business really picked up. We’re breaking last year’s expectations,” Soto said. “That’s due to everyone being home and demand with [PlayStation’s] PS5 and Xbox” releases last fall.

GameStop isn’t the only target for day-traders. Others include American Airlines, the theater chain AMC Entertainment Holdings, BlackBerry, Bed Bath & Beyond, and other public companies with a significant “short” position, meaning bets made by investors that the share price will drop.

GameStop’s current sky-high price isn’t rooted in financial fundamentals or reality, said Samuel Rosen, assistant professor of finance at Temple University. “It shows the power of these online communities” to drive prices, he said.

Thomas Peterffy, chairman of the Interactive Brokers brokerage, was also among those criticizing the campaigns that bid up the GameStop stock, calling it “illegal” and a “manipulation.”

He said on CNBC that his firm’s halt in sales was needed to protect the stock market. “We are worried about the integrity of the marketplace.”

Hedge funds, large institutions such as Vanguard, and first-time traders have all been touched by GameStop.

Vanguard’s index funds are one of the largest institutional shareholders in GameStop, holding roughly 4.17 million shares in its funds as of Dec. 31, according to Bloomberg data.

Yet, the effect has been minuscule on the Malvern mutual fund giant, said Jeffrey DeMaso, director of research at Adviser Investments, which tracks Vanguard funds.

GameStop gained roughly $1.6 billion in value, which is a drop in the bucket compared with Vanguard’s overall assets of $6 trillion. Among more than 40 Vanguard funds holding GameStop shares, the company’s Total Stock Market Index Fund is the largest shareholder, with 1.2 million shares as of Nov. 30.

And there are no business-related reasons why the share price has shot up more than 17 times in one year, DeMaso said.

Instead, it’s a populist movement. “There are layers as to why people are involved in GameStop — Wall Street bashing, pure greed, people getting their stimulus money. It’s a reflection of people bored sitting at home,” he said.

In addition, day-traders are suffering from the “gambler’s fallacy, the belief that what’s happened in the recent past will keep happening in the future. Your successes tell you you’ll have more success,” he said.

R/wallstreetbets and other Reddit message boards are rife with new ideas to drive big run-ups in price, a mania reminiscent of the dot-com boom-bust and the 2008 real estate bubble, academics noted.

“It’s a fine strategy, as long as you’re not the last person buying,” said Rosen. Even his students at Temple’s Fox School of Business have been talking about GameStop’s valuation.

“These are due for a crash, similar to the ones we saw in 2010″ among high-frequency traders, Rosen said. “Prices can go down as fast as they went up.”

What about the online trading war between individual and professional investors?

The GameStop trading frenzy “is a fascinating example of collective action through social media. From what I’ve seen, most of the retail investors joining the Reddit movement understand that they’ve taken a reckless position,” said Nathan Fong, associate professor of marketing at Rutgers University-Camden.

To succeed, “they have to convince everyone — including each other — that they’re a little bit crazy and are going to hold on to their GameStop stock,” Fong added. “So far, they’ve managed to achieve that, in part because they’ve built a subculture that is at once both self-deprecating and hostile to being patronized by the establishment.”

Investors opened up 10 million new brokerage accounts in 2020, according to JMS Securities research. And many of them started trading through online-only brokers such as Robinhood.

But not with Robin Hood Funding, a firm in Wayne that buys settlements and annuities. A victim of mistaken identity, it says it has been fielding hundreds of misdirected calls recently from disgruntled Robinhood brokerage customers, irate at that firm’s moves to restrict purchases.

And those calling in, said firm executive Edward Dabrowski, have not had “the nicest things to say.”