When it comes to video-game retailer Gamestop (NYSE:GME), some folks might call it the original meme stock. The company doesn’t have a positive earnings profile, yet GME stock continues to trade on heavy daily volumes.
Options traders are also jumping into the long side of the trade here. For instance, on Aug. 25, traders purchased more than $1.59 million worth of GME call contracts. One trader went so far as to wager $300,000 that GME stock would “make its way toward $500 by Sept. 17.” Clearly, this one has its supporters in the markets. The dip buyers are locked and loaded.
Of course, the meme-stock phenomenon continues to baffle some commentators; Gamestop’s popularity ruffles feathers. However, investors would be better off embracing the mania here. It’s becoming more and more impossible to swim against the bullish GME tide.
A Closer Look at GME Stock
As a company, Gamestop actually first went public back in 2002. However, the average daily trading volume on its stock shares remained fairly low until early 2021.
That’s when the meme-stock mania ensued; retail traders on social media sites like Reddit went on a buying frenzy. For 2021, GME stock is considered to be the first well-known short squeeze target of the year.
In late February, short sellers who bet against GME lost $1.9 billion in two days. And by late May? Gamestop short sellers had sustained “$6.7 billion in year-to-date [YTD] mark-to-market losses.”
True, there appears to be a resistance level at $300 for this name — GME stock has been rejected at that price point several times. With an army of social-media traders ready at any given moment, however, it’s still easy to envision a permanent breakout above $300 before the end of the year.
To that end, late August’s price action has only served to bolster the bulls’ confidence. During that time, weeks of share-price losses were quickly recouped as GME stock surged from the $150 territory to more than $200 per share.
Leave Your Logic at the Door
As of the Aug. 31 close, shares of GME stock traded at around $218. At the same time, Gamestop’s trailing 12-month earnings per share (EPS) was -$1.78.
Because of that, a strictly logical approach might have investors objecting to the $200-plus price tag. To many, GME stock doesn’t deserve to be at $200, given its negative per-share earnings profile.
Under normal circumstances, this line of reasoning makes perfect sense. But the market environment in 2021 is anything but normal. So, when it comes to Gamestop, it’s probably best to leave your logic at the door. When GME rallies, you’ll lkely only get frustrated if you search for reasons. The recent movement on Aug. 24 provides a good example of this.
On that day, the share price soared 27.5%. And this was despite the lack of a positive company-specific catalyst. An astounding 14 million shares of GME changed hands during that trading session — “more than 5.8 times the 20-day average” for the stock.
Embracing the Mystery with Gamestop
In his article on The Street, writer Martin Baccardax called this price movement a “mystery,” saying that it left “investors struggling to find a reason for the strongest meme-stock rally in more than two months.”
This reminded me of the time in February, when “meme lord” and eventual Gamestop Chairman Ryan Cohen tweeted a picture of an ice cream cone. No explanation — just a picture of a soft serve cone.
That day, GME stock catapulted higher, finishing the trading session up 104%. In July, another tweeted picture — one of Cohen with chopsticks up his nose — got more than 13,000 likes.
Baccardax and other financial writers might be baffled by the meme-stock phenomenon, but that doesn’t matter. All that matters, rather, is the fact this grassroots movement has legs. The data, shown in the price movements and trading volumes of GME stock, are more meaningful than any onlooker’s befuddlement.
The Bottom Line on GME Stock
Gamestop may be the poster child of an irrational market. However, it’s not wise to try to wage war against irrationality. Just consider how much money some short sellers have lost so far.
Holding on to those short positions could lead to further, deeper losses. So, don’t try to make sense of a senseless market. And whatever you do, don’t bet against GME stock right now.
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On the date of publication, David Moadel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.