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GameStop Stock: Trading Up In A Down Market

In the midst of a dismal market, GameStop shares – contrary to the predictions of the “smart money” – have been big outperformers.
  • GameStop's year-to-date performance has outpaced the overall market. GME is up about 4.5% YTD, whereas the S&P 500 has fallen nearly 14% over the same period.
  • Recent catalysts, including a dividend-based stock split, have boosted investor morale and have led GME to rally 72% since the end of May.
  • With short interest and borrow rates climbing once again, it looks like GameStop shares are on the verge of yet another short squeeze.
Figure 1: GameStop Stock: Trading Up In A Down Market

Figure 1: GameStop Stock: Trading Up In A Down Market

(Read more from Wall Street Memes: AMTD Digital's 21,000% Surge Was Not a Meme Play This Time)

Overperforming The S&P 500 In 2022

Even against an unfavorable macroeconomic backdrop, GameStop  (GME) - Get GameStop Corporation Report shares have been delivering. That’s, in large part, thanks to the fact that GameStop trades on the sentiment of its shareholders rather than on the fundamentals of its bussines.

Figure 2: GME vs. SPY performance.

Figure 2: GME vs. SPY performance.

It shouldn’t come as too much of a surprise that GME has shined even in a dreary market. Over the past five years, the stock’s average beta has been negative. (Specifically, GME sports a beta of -0.73 for the most recent five-year period.)

A negative beta is relatively rare with “traditional” stocks. It implies that an asset trades at a negative correlation to the broader market.

For most of this year, however, GME has actually traded at a positive beta. GME’s beta with the S&P 500 has averaged out to 2.0 YTD - that means, on average, GME is trading with, not against, market trends.

At a couple of key times during January and July, however, GME went on a negative beta tear, bucking the market’s movement in dramatic fashion (see chart below).

Figure 3: GME beta's 1-year period.

Figure 3: GME beta's 1-year period.

GameStop's Stock Latest Move

The most significant recent catalyst for GameStop was the company’s 4-to-1 stock split. Although stock splits do not add any fundamental value to a company's business, they do tend to boost investor morale. They can also enhance speculation via options trading (individual options become cheaper as share prices come down).

And indeed, since GameStop's stock split intentions went public, the stock has been on a rally, climbing 70%+ since the end of May.

As a result, July was a rough month for GameStop short sellers. S3 Partners published a report at the end of July stating that GameStop was among the top 10 most unprofitable stocks for short sellers during that month. As of July 21, short sellers had accumulated losses of $443.4 million on GME over the preceding three weeks.

What's Next For GME?

Short sellers were well aware GME’s stock split in July had the potential to be an important catalyst for GameStop shares. And yet short selling activity took no pause. As of June 29, shorted shares were at 53.21 million - after the restated stock split - which implies about 20% of the float was short.

The latest data, as of July 14th, show 59.62 million shares being shorted. That’s an increase of about 12% over the last official figures released.

Meanwhile, borrowing rates for those betting against GME have skyrocketed. For June, the average annualized borrowing rate surpassed 30%. Up until May, borrowing rates were closer to the 5% mark.

Figure 4: GameStop's borrowed shares.

Figure 4: GameStop's borrowed shares.

Borrow rates are determined by market supply and demand. Thus, these high borrowing rates indicate either an increase in demand for GME shares to short, a decrease in available shares to short, or a combination of both.

GameStop is a stock that sees frequent buy-to-cover action. High borrow rates leave the stock vulnerable to short squeezes, as short sellers need to pay increasingly higher fees to cover their positions.

Another bullish point for GameStop is a brightening macro backdrop. Fed Chairman Jerome Powell himself said that he sees some signs of slowly stabilizing prices. Stock’s reacted positively to Powell’s recent comments, and investors may be betting that the upcoming round of interest rate hikes will be less aggressive than those which preceded them.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)