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Mar 9, 2021

GameStop defies gravity again with rally nearing 100% gain

Protecting retail investors should be top of the regulatory action list this year: Columbia Law professor


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GameStop Corp.’s latest winning streak has catapulted it to the highest in weeks as Chewy Inc. founder and activist investor Ryan Cohen continued to shake up operations at the video-game retailer, taking retail investors by storm.

Shares of the Grapevine, Texas-based company climbed as much as 27 per cent to US$246.49, extending a winning streak for a fifth day. The gain follows Monday’s 41 per cent climb after the company said Cohen would lead a new committee focused on its digital transformation.

Retail investors’ Reddit-driven frenzy has kept its shares afloat despite the broader market’s recent volatility and tech selloff. The stock has more than doubled over five days. While the Nasdaq 100 fell 11 per cent into a correction yesterday, it has rebounded by as much as 4 per cent on Tuesday. Even so, GameStop remains far from its Jan. 28 intraday record of US$483.

“It is interesting that GameStop has rallied as other momentum favorites are falling,” said Craig Birk, chief investment officer at Personal Capital. “For some, if they have losses in growth stocks, the quickest way to try to recoup them could be to find the most volatile stock.”

Markets have been gripped by volatility in recent weeks, led by declines in tech stocks, with the selling sending the Nasdaq 100 down as much as 11 per cent from its record. The index was having a respite on Tuesday and a group of 37 retail-mania stocks tracked by Bloomberg rose to its highest since February, but still far from a January high.

“It’s the return of every millennial traders’ favorite bet and it could last a little while longer until bearish bias for bonds returns,” Edward Moya, senior market analyst at OANDA, wrote.

The frenzy has drawn U.S. regulators to consider adding rules for everything from options trading to short-selling. In letters to Senator Elizabeth Warren, the Securities and Exchange Commission and the Financial Industry Regulatory Authority said they’re reviewing potential rules to fix regulatory gaps.

While GameStop remains a favorite for day traders, the momentum stock selloff has caught up with Cohen’s former darling Chewy, alongside the likes of pandemic winners Peloton Interactive Inc. and Zoom Video Communications Inc.

It is an inconvenient time for the online pet-products retailer that Cohen founded to take a tumble. The Dania Beach, Florida-based company has shed a third of its value from a Feb. 12 record -- that compares to a 360 per cent surge for GameStop over that same stretch.

While Cohen’s push was applauded by investors, some skeptics like Wedbush analyst Michael Pachter said the latest update was expected ever since Cohen took a stake in the company. Instead he credited the stock’s return as a “Reddit Raider favorite” for the rally.

GameStop’s market value jumped to US$17.1 billion amid momentum initially spurred by a Thursday tweet from Cohen. The apparent screenshot from a television ad renewed chatter on Reddit and came one week after a picture of an ice cream cone tweeted by Cohen on Feb. 24 sparked a massive rally.

While Personal Capital’s Birk said the latest Cohen news appears positive for the stock, he but argued that “transformations take time and some fail.”

“It feels premature to assume GameStop’s challenges from a few months ago radically eased,” he said.