GameStop Stock: Short Sellers Are Not In A “Comfortable Position”

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The battle between GameStop  (GME) – Get GameStop Corp. Class A Report bulls (or rather, “apes,” as they are known) and bears is far from over. Lately, GameStop and other meme stock companies have been handing it to those who’ve bet against them.

Here, we’ll take a look at a capital management firm that owns short positions in GameStop. They recently outlined their “long-short” fund investment thesis and their expected next steps after a disappointing quarter.

Figure 1: GameStop Stock: Short Sellers Are Not In A “Comfortable Position”

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(Read more from Wall Street Memes: Meme ETF: These 2 Stocks Are Not Obvious Meme Plays)

Inside A Short Seller’s Mindset

The Amalthea fund, created by the Australia-based capital management firm Bronte Capital, has a “long and short” strategy. On the short side of things, they’ve taken up positions betting against almost every major meme stock, including both GameStop and AMC.

Recently, the fund released its Q1 performance results to investors. Although the fund did not do as badly as global markets in general – it fell 5.97%, while the MSCI All Country World Index  (ACWI) – Get iShares MSCI ACWI ETF Report fell 12% – the fund’s managers said they were dissatisfied with the quarter’s results.

One of the main reasons behind Amalthea’s lackluster performance was a meme stock rally in March. The fund specifically made reference to its bearish GameStop position when discussing this rally.

Bronte Capital believes that GameStop’s valuation is ridiculous, even when one factors in the modest success the company has had in reinventing itself. Fund managers commented that GME’s recent financial results have been terrible and that the company’s market cap doubling in March was “absurd.”

However, the firm also admits that it is aware that GameStop’s “absurd” valuation could still double again in the near future.

“[GameStop’s] valuations are absurd but if you double the price they are not twice as absurd. They are just similarly disconnected from reality.”

Bronte Capital’s bear thesis on GameStop incorporates momentum as well fundamentals. Fund managers believe that “retail mania” is waning and that recent volatility still pales in comparison to last year’s January squeeze.

Hard Times Ahead For Short Sellers?

Bronte Capital outlined some potential approaching catalysts for GameStop and, perhaps, other meme stocks too.

GameStop announced a stock split proposal which is to be voted on in early June. Although a stock split, theoretically, adds no value to a company’s fundamentals, according to Bronte Capital “not accepting that stock splits add value is a recipe for losing money.”

The relevance of a stock split is most evident in the options market, where a standard put or call contract leverages 100 shares of an underlying asset. Options, thus, tend to be more expensive when the underlying shares themselves are more expensive.

To provide an example, a near-term, slightly out of the money (OTM) GME call option contract – strike price $129, expiring on May 6 – currently costs $800. If GameStop offers a 3-for-1 split, similar near-term OTM calls may sell for only $266. A reduced GME share price would make basic GME options more accessible to the masses (i.e., retail traders).

Bronte Capital has thus been warning about the potential impact of a stock split on the GME options market. Originally, they themselves were skeptical; they believed options trading was driven largely by professionals with significant capital at their disposal, not “retail weirdos.” However, the equity firm has come around to realizing that retail traders can be the primary drivers of options prices, which can in turn influence stock – especially meme stock – performance.

This threat of options-driven volatility puts Bronte Capital in a self-described “position of little comfort.”

GME Is Still Heavily Shorted, A Squeeze Could Be Imminent

To sum up, and to repeat what we’ve said in many of our GME articles over the past few months, short sellers are still playing with fire. And they know it. GameStop’s short interest is currently at 21% of its float, with about 14.13 million shares being shorted. The number is higher compared to the previous month, when 12.35 million shares were being shorted.

A high short interest can of course be related to a company’s poor fundamentals. But, a short interest above 15%, which is considered to be quite high, can set a stock up for a squeeze. Especially if there’s significant buying pressure triggered by some short-term catalyst – such as, say, a stock split.

(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)