Less Dumb Investing

The week of May 13th has been an exciting one for retail investors. Actually, that’s not quite accurate. The retail investors I know aren’t exactly buying into GameStop’s recent meteoric rise. It shouldn’t shock most investors to see the meme-stock rally of May 2024 as a temporary blip. However, what should shock investors is the extent to which the ardent believers in GameStop truly believe in the power of the stock.

Let’s start with some history. GameStop had a 1-year price range, prior to May 2024, of roughly $11 to $25 a share. By March 14th, GameStop shot up to $64.83 a share in open market trading; premarket trading saw it near $75 a share, but the price traded lower throughout the day. The share price continued to trend lower throughout the week, leading into Friday’s dilution event.

On Friday, May 17th, 2024, GameStop issued press releases with two key pieces of information. The stock posted a fiscal Q1 loss expected to range between $27 million and $37 million. The company also filed a notice that it received permission from its board to sell 45 million shares of equity through at-the-market transactions or directly placed secondary offerings. In short, a dilution event to take advantage of the runup in share price.

Most companies don’t tend to dilute after posting net losses. But then again, most companies aren’t meme stocks.

Where the story gets more exciting, and more bewildering, is the reaction from GameStop’s most ardent defenders. Reddit’s “GME” and “Superstonk” subreddits are a cornucopia of mismanaged dreams mixed with euphoria that should only be possible with drugs. The misplaced hatred against short selling, combined with reverence for a failing firm, leads to an idealized hope that GameStop will rise from the dead and cause the collapse of Ken Griffin’s Citadel LLC.

I particularly enjoy this particular post: “personal opinion on why we dropped 70% in 2-3 days – DSPP LIMIT SALES” as an example of the loyalty of the GME believers. I won’t go into it; it’s just somebody grasping at straws as to why a stock could drop so heavily after such an inflated runup. I’ve been working in sales and trading in commodities, fixed income, and mortgages for 10 years and I have no idea what the individual is saying.

Then you have the users who believe that the shelf offering has (1) already occurred and the sales are completed or (2) explaining how in finanical theory that a secondary stock offering could be a net neutral or positive function for a stock price. The latter is technically accurate in the sense that, assuming zero transaction costs, selling equities for cash merely increases the net assets of the firm, balanced by the increase in equity count. Assuming no slippage, the firm could technically purchase back equities at the same value they sold, creating a net neutral effect. I won’t lambast technically correct theory; only its incorrect implementation.

Then there’s the idea of a MOASS: the “mother-of-all-short-squeezes.” Their hopes is that Gamestop will short squeeze as shorts are forced to close out their positions as send the price higher. It’s not impossible, but it also points to a divergence of hopes from a second group.

It’s not fair to say that the community is only focused on buying and holding, because their community is a collection of similar, but not identical, minded individuals. Within the same cult, you have divergent theories. Some individuals plan to purchase shares, send them to ComputerShare to prevent short selling, and hold until the cold death of the universe. They assume GME will become a conglomerate in the form of Berkshire Hathaway, where their shares will continue to increase in value or they will receive dividend payouts (never mind the fact that GameStop is currently losing money). Or perhaps they don’t care.

As someone who thinks the meme madness is foolish and sees it financially affecting the lives of its investors, I get a sense of enjoyment reading the complex web of theories that guide their optimism. To rephrase: it’s very entertaining to scroll through the “SuperStonk” and “GME” subreddits. For seasoned financial experts, it’s our version of Jersey Shore.