Skip to main content

What Beta Says About GameStop Stock

As a negative-beta stock, GME was anoutlier last year. Here is what GameStop's current beta coefficient says about the stock.

Many investors and traders consider the beta metric to be a key element to consider while evaluating a specific asset. GameStop stock  (GME) - Get GameStop Corporation Report is a bit of an odd bird when it comes to beta. Due to its extreme, retail-driven trading behavior last year, GameStop actually boasted a negative beta.

Here is what the beta coefficient is, and here’s what it currently says about GameStop stock.

Figure 1: What Beta Says About GameStop Stock

Figure 1: What Beta Says About GameStop Stock

(Read more from Wall Street Memes: GameStop Stock Q1 Earnings: Business As Usual)

What Is Beta?

Beta is a coefficient that measures the price behavior of securities in comparison to the overall market or to another asset or basket of assets.

When a stock’s beta coefficient is 1.0, this implies that its share price is perfectly correlated with the market. E.g., if the market rises 10% over a month, you’d expect a stock with a beta coefficient of 1.0 to also rise 10% over the same period. If the market were to drop 5%, you’d expect the stock to drop 5%.

A beta above 1.0, meanwhile, suggests above-market volatility (e.g., the market rises 10% while an individual stock rises 20%). A zero beta suggest no correlation with the market.

And, finally, a beta that is below zero - a negative beta - indicates a stock has an inverse correlation with the market. Companies with negative betas are fairly rare. One common exception example is precious metal mining companies. Shares of these companies often rise when the market tanks, as precious metals, such as gold and silver, are seen as hedges against market downturns.

(Read more from Wall Street Memes: GameStop Stock: Everything That Happened During GME’s 2022 Shareholders Meeting)

GME: From A Negative-Beta To A High-Beta Stock

During 2021, the unusual trading activity experienced by GameStop's shares during “meme mania” led to GME’s shares becoming detached from their underlying fundamentals.

“Meme-y” trading also had an impact on GameStop’s negative beta. In August of last year, GameStop had a negative beta, -6.8, according to Infront data. Other meme stocks, such as AMC Entertainment  (AMC) - Get AMC Entertainment Holdings Inc. Class A Report, also had a negative beta during the same period.

Figure 2:undefinedGameStop's beta at the end of August 2021.

Figure 2:undefinedGameStop's beta at the end of August 2021.

One potentially positive aspect of a negative beta is that investors may turn to negative-beta stocks during market downturns. Last year, buying GME could have actually been an effective market hedging strategy.

However, when looking at GameStop's beta for June of this year, we see its value has flipped back into the positive column: 2.77. That’s a high value compared to the average beta of GME’s peers: 1.09. GameStop's current high-positive beta implies that this time the stock tends to follow the market, yet with volatility that is almost three times greater than the overall market.

Figure 3: GameStop's beta at the beginning of June 2022.

Figure 3: GameStop's beta at the beginning of June 2022.

So, if the S&P 500 were to rise 10% over a given period, we would theoretically expect Gamestop to rise 27% over the same period. The reverse, of course, applies too. If the S&P were to fall 10%, we’d expect GameStop to fall a full 27%.

The Bottom Line

GameStop stock is no longer an extreme outlier when it comes to its beta. In fact, due to the GME’s current high, positive beta, investors will want to rule out the strategy of buying shares as a market hedge.

Beta data shows us that, recently, investor sentiment around GameStop stock has shown itself to be strongly correlated with market trends. Indeed, we’ve seen macroeconomic bearishness extending to all assets – but especially to the high-risk ones, such as meme stocks.

A beta of 2.77 shows that GME appears to be a high-risk, high-reward stock. Given its volatility, we can firmly assume that GME is anything but boring. We expect this meme stock to continue to be a boon to traders and short squeeze hunters alike, with small but meaningful catalysts acting as strong movers for the foreseeable future. 

(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)