Markets down today with $GOLD prices up by 1.4%. Our gold miner, Polymetal $POLY.L is up buy over 3.5% and is doing its duty of hedging us against a bad day for stocks. Today, we will talk about GameStop, the most shorted stock in the world and how it has the potential to skyrocket.
Is GameStop the Next Blockbuster? Bankrupt or Short Squeeze
Everytime I mention that I'm investing in GameStop $GME I hear this argument that it is the next Blockbuster, is it? I think that GameStop is a dying business but there's still money to be made from GameStop.
Blockbuster went bankrupt in 2010 mainly because of online competition from Netflix $NFLX . The company had a lot of debt and there was no way that they would generate enough cashflow to repay these debt.
GameStop has cash, they are expected to generate a positive cashflow in the coming years especially with the launch of the new consoles from Microsoft and Sony (the Xbox and the Playstation) later this year. Blockbuster didn't have this luxury. Blockbuster was not a cyclical stock. GameStop will go out of bankrupt in the coming years just like Blockbuster because they cannot compete with Amazon $AMZN or other online retailers but there's still a lot of money to be made on GameStop. The company has great fundamentals and they are buying back their shares which will be a great thing if the stock price moves higher.
The technicals of GameStop, however, look better than the technicals. Right now, 96% of the shares outstanding of GameStop are being shorted. Shorting stocks is common. Most companies are being shorted. Tesla $TSLA is famous for being the most shorted stock in the world. That's only in terms of the dollar amount. Right now, only 13% of the shares of Tesla are being shorted and the record is about 30% in 2013. With GameStop, 96% of the shares are being shorted and this can lead to a short squeeze.
In 2008, Volkswagen Group was being acquired by Porsche and 10% of the shares (out of the 30% that were being traded) of Volkswagen were being shorted. In a weekend, Porsche announced that they acquired an extra 20% of the company. There were not enough shares to cover the short positions and a short squeeze happened. Volkswagen Group stock gained 300% in a single day and the company became the largest company on Earth. The same thing can happen to GameStop and the gains could be even bigger as there are no enough shares to cover 96% of the shorts and GameStop is still buying more of its shares.
To avoid the short squeeze, the short sellers may decide to take the company private. That will be enough to make a profit on GameStop. There's also activist investor Michael Burry involved and he's certainly looking to make a big profit on GameStop. We cannot know for sure what will happen but any good news to GameStop (which is likely to happen with the new consoles) can trigger that short squeeze. There was another short squeeze to GameStop stock in 2013 but it was on a much smaller scale.
GameStop is 7% of my portfolio, if I'm wrong, I lose that money over the next years when GameStop goes bankrupt. If I'm right that 7% can become 35% or even more. I'm ready to take that risk.
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