Over the last two weeks, an army of retail investors has banded together to “squeeze” institutional investors with short positions in GameStop Corp (GME). The retail community took long positions, forced fundamental shorts—like Melvin Capital—to cover their bets, and sent the stock’s share price soaring from $43 on Jan. 21 to nearly $350 on Jan. 27. It also led Robinhood to temporarily halt, then limit, trading on the name. Considering the amount of money made on paper, it seems reasonable to suggest retail investors—like those subscribed to the WallStreetBets forum on Reddit—will continue to take aim at heavily shorted companies.
The most heavily shorted component of the JohnWallStreet Sports Stock Index is FuboTV. As of Jan. 29, the VMVPD had more short interest than all but three publicly traded companies (GME, AMC and SPCE), with 71.91% of its outstanding shares covered by shorts. Conversations with a pair of well-respected Wall Street professionals—Jack Ablin (chief investment officer, Cresset Capital) and Will Hershey (CEO, Roundhill Investments)—suggested the streaming service could be the next company retail investors target to send “to the moon.”
Our Take: While GME has received the bulk of the attention, retail investors have found success targeting a host of names with heavy short interest. Over the past week, AMC, KOSS and CRSR have all experienced price action that mirrored GameStop’s rise (albeit to a lesser extent). Ablin said, “As long as most people are making money [with the strategy], there is no reason to believe [the retail community is] going to stop” taking long positions in companies where a large percentage of the float is short. Hershey agreed the approach is likely to continue. “Retail found an edge and exploited it,” he said. “They are going to continue to exploit [their] edges where they have them. Right now, the lowest hanging fruit is in going long on names that have short interest, particularly in these smaller to mid-cap stocks.”
FUBO seemingly has all of the characteristics retail investors are on the hunt for, so it’s no surprise retail money has already started to come in long on the company and is pushing the stock price higher. “There were a couple of days [last week] where FUBO was up 10, 20%, while the market was flat-ish,” Hershey noted. The trend line continued yesterday with FUBO climbing another 24% (to $52.40). For what it’s worth, the S&P had its best day of the year on Monday (+1.60%).
Moving forward, Hershey expects less crowding in shorts. “I don’t think you’re going to see 50, 60, 70, 100% short interest anymore, because hedge funds are going to learn from this,” he said. If that vision comes to fruition, retail investors are going to need to find another way to gain an advantage. Ablin suggested one potential strategy may be to “pile into [micro-cap names or Russell 2000 companies] that are very thinly traded. [If retail investors] start piling into those kind of names, you’re going to see the stock price go up a lot.” Dover Motorsports (DVD), MSG Entertainment (MSGE), Manchester United (MANU), Liberty Media Corporation (BATRA), and Daktronics (DAKT) are companies within the JohnWallStreet index that would seem to fit the bill.
Hershey suggested the retail community is likely to look towards companies they know, believe in and regularly interact with. He cited Penn National Gaming (another name in the JohnWallStreet index) as an example of a company that would meets those prerequisites.
Jefferies recently published a list of stocks that are “net long, but lack liquidity [and] could see outsized moves.” Madison Square Garden Sports Corp. (MSGS) and Sinclair Broadcast Group (SBG)—both components of the JohnWallStreet index—were among those listed. While the equity research and strategy firm may be right, it won’t be because of a coordinated effort from retail investors to short the companies. What we saw occur with GME “is a long-only strategy. All [retail investors] can do is sell what they already own. They can’t short what they don’t own,” Ablin said. That’s because while they may be willing to lose everything they have to invest (which would happen if GME goes to $0), by shorting the stock they could lose more than they have to invest. And as Ablin explained, “If a $10 stock goes to $1,000, their liabilities are unlimited.” Even if retail investors wanted to take that risk, it seems highly unlikely the trading platforms would let them.
It’s important to note that just because retail investors have made a bunch of money on paper over the last couple of weeks, that does not mean they’re going to come out on the other side of these trades with a profit. As Hershey said, “There are a lot of people [that have invested], that don’t exactly know what they are doing.” Remember, people bought into GameStop at $500 last week (at least 25x its true value). “Ultimately, fundamentals win out and somebody is going to end up losing a lot of money when [the price in GME inevitably falls],” Ablin said. Hershey agreed. “Prices eventually reflect some semblance of fair market value,” he said.
Before the current run-up (+115% since Jan. 4), FUBO was already a popular name on the WSB forum and a favorite among retail investors (at least according to social scraping platforms). But doubts about the company’s underlying business had bears like Rich Greenfield calling it one of “the most compelling shorts we’ve ever identified” and betting the share price would drop below the $10 price it IPO’d at (which is why the stock is so heavily shorted in the first place).