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How the GameStop (NYSE: GME) party ends

Howdy Rask reader,

You know GameStop (NYSE: GME). It’s the stock everyone is talking about.

Yeah, that one…

In the past 24 hours, I’ve been called for interviews from a radio station, a television channel, and a major news outlet asking one thing:

“Can you explain what’s happened with GameStop?!”

GameStop stock price. Source: Google Finance

Okay, here goes…

GameStop shares are up ~1,000% this year.

But go back 12 months and the stock is up around 45x – or 4,500%. Meaning, a $2,000 investment in GameStop 12 months ago is worth around $90,000.

Yesterday, when the stock was ~80% higher, meaning that $2,000 investment was worth around $160,000. Down $60k in a day? Ouch!

Is GameStop just a great investment?

No. I don’t think so.

The GameStop ​share price is up because of something spectacular. And by that I mean I’ve never seen it before…

GameStop is just like any regular video games retailer that you see at your local shopping centre. Think of EB Games. It’s a place where people buy their games for Xbox, Playstation, Nintendo and the like.

If you ask me, there is nothing spectacular about the GameStop business. Its revenue has steadily fallen since 2013. The once yearly profit has become consistent losses.

GameStop revenue and profit going down. Source: Tikr.com

Basically, based on the financials alone, GameStop is not a stock the analyst team at Rask would touch.

So, what’s the real reason the GameStop share price is up?

The real reason the GameStop share price has risen ferociously is pretty simple:

  1. Short sellers – investors who make money when shares fall – have targeted GameStop for a long time.
  2. A band of Reddit users saw the short sellers’ positions and bought the stock, rallying the share price against the short sellers.

Wait, so what exactly is short selling?

 

As our video on short selling explains, a short seller can lose more than 100% of their investment but they can never make more than 100%. Meaning, the cards are stacked against them.

Worse still, if a stock price starts going up (the opposite direction of what they want), the short sellers are forced to buy back the shares they shorted – further pushing the price upward. This is called a short squeeze. And it’s vicious.

Imagine someone (the short seller) squeezing a tomato sauce bottle – with the lid off. They see nothing but red.

The short squeeze is the reason GameStop shares have gone up.

How the GameStop party ends

I think the GameStop rollercoaster is a sure sign of too much money sloshing around the system, combined with few good options for investment – and a band of traders artificially propping up a stock.

While it seems like a non-stop party for investors, please mark my words: it will end. The shorts will be squeezed out. Reddit will run out of sauce.

So, before you buy the shares, remember this:

If 99% of long-term investing is doing nothing, and the other 1% changes your life – GameStop could change it for the worse.

As always:

  • Only ever buy shares which you understand (the sleep at night factor)
  • With a 3-5+ year time horizon (anything less is speculation)
  • And keep your emergency cash set aside (enough for 6 months, at least)
  • Invest little bits, lots of times (compounding is very powerful, never interrupt it!); and
  • Only buy the best investments you can find.

It might sound easy, but it’s not simple.

And just so you know, I’m still fully invested and the Rask Invest team is narrowing in on our next official stock idea for our members (it’s a company with very attractive fundamentals – and it’s been sold down recently).

Onwards & upwards!

The Rask analyst team has launched its most ambitious investing mission of all time...

Find (and buy) Australia's 10 best small-cap shares.

Our analysts have identified 10 ASX shares that could potentially return multiples of the initial investment over the next 10 years. But make no mistake, this mission isn't for the feint of heart. It's a high-risk mission for serious investors only.

The Rask Rockets program is our most advanced, most highly valued ASX investor research service.

And guess what, we've given away 1 free Rask Rocket Beyond share idea, plus one of our best Rask Rockets Apollo mission companies and another one of our top stock ideas from Rask Invest -- all FREE! You can get the stock ideas by listening to a recent episode of Australian Investors Podcast, as part of our Beyond re-opening sale.

Just click here to get the names and ASX stock ticker codes of 3 of our team's best stock ideas.
At the time of publishing, Owen does not have a financial or commercial interest in any of the companies mentioned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

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