After a wild 24 hours on Wall Street that saw beleaguered video game retailer GameStop become the center of a frenzied stock snatch-up, it’s unsurprising that top executives and investors in other publicly traded firms — including footwear — are scrambling for answers.
Shares for GameStop soared a staggering 1,700% in a matter of hours yesterday as scores of small investors, buoyed by discussions on the social media platform Reddit, took to the Street in a bid to sock it to two hedge funds they believed were shorting the video game retailer’s stock. (Short sellers trade borrowed stock under the belief that the stock’s price will drop and they can buy it back and pocket the difference as profit. GameStop’s shares, prior to the buyup, had a 52-week low of $2.57.)
While the tale could read like a modern day “David and Goliath” drama, it’s not quite the good-guy-saves-the-day fable some might think — according to Steve Marotta, managing director and director of research at CL King & Associates, if small investors were looking to save GameStop from demise, “they’ve used a cannon where a hammer may have been appropriate.” (The company, which sells new and used games had been a favorite among gamers who enjoyed being able to make money by trading in their used systems, has closed hundreds of stores over the past year as it struggles with the shift to digital gaming.)
What’s more, as Marotta and other market watchers have noted, it’s hard to ignore the fact that the “Davids” in this tale are substantially lining their pockets and there may be very limited long-term benefit to GameStop — or any other distressed company — being swept up in a bubble that experts say is likely to bust sooner rather than later. (Robinhood, which caters to small investors, already barred users from buying any more shares in several companies including GameStop.)
“Such a situation is completely net neutral to a company or maybe even a little bit negative,” explained Marotta. “For an organization to be going through something like this is a big distraction — the best thing you can do [as a publicly traded company] is desire a stable investor base and this kind of pricing dynamic doesn’t attract stable investors.”
The only exception, said Marotta, is if a company whose seeing its share price explode amid this sort of rampant activity can “pull the trigger on some sort of overnight banking deal to raise a bunch of money to fill their coffers” — which would require executing the highly unlikely feat of putting together a proposal and cinching a deal in a matter of hours or days.
For now, according to Matt Powell, VP and senior industry advisor for The NPD Group Inc., the frenzied selling on Wall Street bears a striking resemblance to some of the activity on resale platforms in that, on occasion, well-intentioned amateurs can do more harm than good to themselves and others.
“In both cases you’ve got people who are looking to make a quick buck and maybe don’t really understand the dynamics of either platforms, whether it’s the stock market or a resale platform,” he explained. “And that’s what drives the prices up. [For instance, in resale,] you’ve got a kid thinking the price of every shoe is going to go to $9,000. And that’s simply just not happening. And you’ve got people who are looking at the stock and thinking ‘this stock is going to continue to grow because it grew so much’ — but [it’s misleading].”
He added, “It’s two things: A lack of understanding about how the system really works and an attempt to make a quick buck.”
If this activity is potentially as problematic as some have indicated, the good news for shoe stocks, said Marotta, is many don’t currently fit the bill for what this wave of feverish small investors are looking for.
“The things that this retail investor crowd are choosing are: smaller cap, highly shorted, distressed names that are having existential issues,” he said. (Notably, Under Armour in 2016 was listed as one of the most shorted stocks on the S&P 500.)
For now, as Jane Hali, CEO of Jane Hali & Associates, noted, many analysts and companies are watching the “new phenomenon” closely and seeing how the powers-that-be, including the United States Securities and Exchange Commission, act.
“We don’t have an answer it is a new phenomenon where brokerage houses are now setting limits and the exchanges are studying the problem with the government,” Hali said.