A retail investor-driven rally, fueled in part by conversations and information sharing in the Wallstreetbets chatroom on Reddit, has added more than $25 billion in value to three COIVD-hit companies so far this year.
GameStop Corp. (GME) - Get Report, Bed Bath & Beyond Inc (BBBY) - Get Report and AMC Entertainment (AMC) - Get Report have been the biggest beneficiaries of one of the most dynamic trends on Wall Street in at least the last decade, even as the trio suffer notable hits to their business models from the coronavirus pandemic and forecast slower growth and difficult times over the coming months.
Often dismissed as ill-informed, and sometimes exploited by byzantine regulations and unwritten rules that favor Wall Street professionals, retail investors are enjoying a rare moment of influence amid an otherwise range-bound market stiffed by weakening economic growth and stubbornly high coronavirus infection rates.
And while it's impossible to collectively identify the forces that drive the investment decisions of millions, there is enough evidence to suggest that the combination of zero-commission trading platforms such as Robinhood, and free-flowing discussions on market-focused chatrooms found on the online community Reddit, are hugely contributing factors.
The vortex of information, opportunity and access -- not to mention the fact that millions of day-traders remained locked inside as the pandemic continues to rage -- has lifted a host of stocks to fresh record highs, but perhaps most notably has added $25 billion in market value to heretofore underperforming companies: GameStop, which has increased by $17.3 billion since the start of the year, Bed, Bath & Beyond, which is up $5.1 billion, and AMC, which has added $3.14 billion in market value since the end of December.
It's perhaps no coincidence, then, that those three shares are among the most heavily shorted on Wall Street, according to data from S3 Partners, with investors betting against GameStop -- and thus offering shares to buyers of the money-losing video game retailer for sale in the open market -- leading the charge.
Another dynamic driving share prices in these three companies -- as well as several others -- is the rising volumes seen in stock options markets, particularly those known as "out-of-the-money" options.
A call option buyer has the right, but not the obligation, to own shares of a company at a certain price at some specified point in the future. He or she might think owning a call option on GameStop with a $350 strike price, when shares are trading at $300, is a better way to play the stock's momentum. But it can also lead to steep loses if the share price falls and the options expire worthless.
That's especially worrying given that margin debt, an age-old benchmark for measuring retail investor demand that tracks borrowings held in brokerage accounts, hit a record $778 billion in December, extending a 28.4% increase from 2019,
Furthermore, options sellers will often buy the underlying stock in the open market as its price moves higher, in order to hedge their risk, creating a virtuous, but potentially ephemeral, circle of ever-higher prices.
And while it's difficult to gauge exactly what's driving the meteoric increases in GameStop, Bed, Bath & Beyond and AMC, it's much easier to find those who've lost billions from being on the other side of the bet.
S3 Partners, which tracks details on short positions, said there was more than $5.5 billion in bets against the stock at the close of trading Tuesday, representing 71.8 million shares, but also noted that short-sellers are nursing losses of more than $5 billion since the start of the year.
Citron Research, a high-profit short-seller that published a report highlighting GameStop's weaknesses last week, has claimed to be the victim of harassment and threats from Reddit users before pulling its position against the stock.
CNBC has also reported that Melvin Capital, a hedge fund run by Gabriel Plotkin, exited its GameStop short late Tuesday, while several questions over the strength of its liquidity and capital remain.
The spillover impactions for the broader market were clear on Wednesday, as the Dow Jones Industrial Average tumbled more than 400 points in early morning trade, despite last night's blowout earnings beat from Microsoft (MSFT) - Get Report, and benchmark 10-year Treasury note yields fall below 1%. Bitcoin also traded below $30,000 for the first time in more than a week.
GameStop, meanwhile, seemingly can't be stopped: shares are up 112% on the New York Stock Exchange and changing hands at $312.00 each. AMC is up 242% at $17.00 and Bed Bath & Beyond has risen 27% to $47.30.