Are you kidding me? That is what many investors are thinking as they watch names like Game Stop (GME), AMC (AMC), Express (EXPR) and others skyrocket in price and trade with extreme volatility. Adding to the bewilderment is the fact that COVID-19 has impacted these companies negatively and forced some of them to the brink of bankruptcy. So, what is going on here and, more importantly, what does this mean for you?
The best place to start is with a description of how short selling works. It begins with someone borrowing a stock and selling it with the hope they can repurchase the shares later at a lower price and make a profit. The lower the repurchase price, the greater the profit for the short seller. However, if the price rises, the short seller loses money. The higher the price, the greater the loss. Since - in theory - stock prices can rise indefinitely, short selling losses can be unlimited. Not only is there a lot of risk, but there are also many costs and complications associated with short selling, which is why this strategy is mainly the domain of hedge funds.
A Reddit forum for stock traders with over 5 million users called r/WallStreetBets entered the picture. For a variety of reasons, the r/WallStreetBets users began a coordinated buying of Game Stop shares which led to a meteoric rise in its price. Then short sellers (hedge funds) began buying shares to cut their losses which drove prices up even more. This cycle, repeating over and over, is known as a “short-squeeze”. AMC, Express and several other company stocks experienced a similar short squeeze.
What does this mean for you as a CPC client? We reviewed our models and identified a holding that had increasing exposure to Game Stop and sold that position after the Investment Committee concluded that its financial fundamentals and outlook could in no way support the current price. Some of you may still have a tiny exposure to Game Stop and the other companies mentioned in this report through the broad stock market based mutual funds and ETFs in your portfolio, and we are content with that amount of exposure. The foundation of our investment process is diversification and avoiding undue concentration in any stock. The rise and fall of Game Stop or any other company should not have excessive influence on your portfolio’s performance. The CPC Investment Committee continually monitors market conditions and looks for sound investments to achieve your goals, but we will never chase fads.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services are offered through Consolidated Planning Corporation. Consolidated Planning Corporation is not a registered broker/dealer and is independent of Raymond James Financial Services.
Investment advisory services are offered through Consolidated Planning Corporation. Consolidated Planning Corporation is not a registered broker/dealer and is independent of Raymond James Financial Services. Raymond James financial advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered. Therefore, a response to a request for information may be delayed. Please note that not all of the investments and services mentioned are available in every state. Investors outside of the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Contact your local Raymond James office for information and availability.
Raymond James Privacy Notice | © 2018 Raymond James Financial Services, Inc., Member FINRA / SIPC