The only bet riskier than buying meme stocks like GameStop may be cheering for their decline. That's the lesson Wall Street's short-sellers are learning the hard way this week.
See here: For the first four months of the year, GameStop short-sellers — investors who bet on a stock's decline — were sitting on $392 million in gains, up nearly 50%. But with this week's surge, those gains have vanished and left shorts with more than $1.2 billion in paper losses, according to research from S3 Partners.
Nearly $1 billion of that was wiped out Monday alone.
To understand the meme stock phenomenon, it helps to understand a bit of the tribalism underpinning it.
When meme stocks first emerged in 2021, the day traders running up the price of GameStop weren't a bunch of anti-establishment marauders attacking Wall Street generally — they were going for the short-sellers, regarded by many, from retail investors to CEOs, to be the most reviled traders in finance. After all, no one likes the guy who gets rich off of others' failings. (Short-sellers argue, however, that they play an important role in preventing market bubbles.)
Disgust for short-sellers fueled GameStop's 2,000% surge that ultimately squeezed firms like Citron Research to retire from the short-selling game and, a year later, forced the hedge fund Melvin Capital to fold entirely.
The Reddit community that originated the frenzy, WallStreetBets, preached an us-vs.-them investing style, often using profane language and memes to paint the short-sellers as the enemy. If you were one of the Apes (as the day traders called themselves), inflicting financial pain on the shorts was just as important, if not more important, than lining your own pockets.
Meme mania 2.0?
Although the meme fever is rising this week — set off by a single, wordless social media post by the GameStop stock guru RoaringKitty — we're unlikely to see a repeat of the frenzy that gripped Wall Street three years ago.
At that time, GameStop's "short interest," aka the number of shares sold short relative to its total public float, was a staggering 140%, meaning some shares had been shorted more than once. Today, short interest is just 24% — firmly in negative sentiment territory, but nowhere near the absurd levels of January 2021.
Today's GameStop shorts aren't likely to hang on and repeat the mistakes of their Melvin Capital brethren.
Then again, shorts and their meme-pushing long-positioned enemies share a reputation for relentlessness. Looking at the fundamentals of GameStop — a mall-based retailer that's burning through cash and has already slashed expenses to stay in business — it's easy to understand why folks are wagering that it's on the decline.
"Buy to cover" trades will force a lot of shorts out of their positions and push GameStop's stock price higher than the day traders could on their own, wrote Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, in a note Tuesday.
"But there will also be new short sellers entering the ring, with GME's stock price over $30 being an attractive entry point."
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