- GameStop (GME) is a hedge fund slayer, but in need of a bit of help.
- Its financial metrics are at odds with its stock prowess.
- Trading the ranges tactically may be where the easiest gains lie.
In order to describe GameStop (NYSE:GME) stock I would need to use terms like resilient and contentious. In the hands of relatively new traders, GME stock has become a weapon to slay hedge funds. Since 2020, many pros tried to bring GME to its knees. But a bunch of them went broke doing it. Those who survived are shrinking to survive their wounds from being short GME stock. This is a hot stock, so there is no use messing with its devotees.
What has been less clear is the viability of the business going forward. Judging purely by the financial results, there isn’t a good story to tell. Revenues have been shrinking for a long while. Last year, GME revenues were 35% smaller than seven years ago. The 2021 net income was a decline of $382 million versus a $402 million gain in 2015. Clearly the trend is not the friend of GameStop stock investors. At least not on paper.
GameStop Fundamentals Are Still Unclear
Despite its woeful financial metrics, this hasn’t translated into stock losses. GME stock now is 400% higher than in 2015 when the business was much stronger. The reaction in the stock from the pandemic was counterintuitive and borderline stupid. However, the Wall Street adage to not fight the tape applies perfectly here. It doesn’t matter what we think of the stock, what matters more is how it’s trading.
It’s easy to get emotional and to want to fight the trend out of principle. But the results can be financial devastation as even pros have been learning. I am not bearish the stock, but it’s definitely not my favorite. If you force me to trade it, I would do just that: Trade it. It is not clear to me that there is an investment opportunity here, but that doesn’t mean there aren’t profits ripe for the taking.
In March GME fell to $78 per share, and less than a month later it had already rallied 154%. Clearly those edges mark extremes, and they don’t usually last. Case in point, it is now almost exactly in the middle deciding on which way to go next. The relatively safe way to trade it is to be active inside the range. The term I would use to describe the style would be tactical. For that I would have no long-term expectations, just shorter-term gains.
Don’t bother turning to experts for advice, because they seem clueless. According to Yahoo Finance, most of them are literally in a holding pattern. Meanwhile, current price is 2.7 times their average and 1.5 times their highest price target. How they can have both those things together defies logic. Using simple logic, I see no evidence or reason to hold it for the long term. GameStop’s evolution plans are still too obscure for me, and I would need more tangible milestones. Last year it was one thing, and this year it is another with NFTs.
Trade GME Stock on Your Terms
Technically, the range is tradable with two visible extremes. GME stock has support below $78 per share. Conversely it has sellers above $175 per share. The price should ping pong between the two, until one of these edges fails. Active investors can then time their entries and exits at the extremes within the range. But once an edge fails, investors will then overshoot in that direction. Both bulls and bears need to be realistic with the fact that they can both eventually be wrong in a big way. They should not discount the potential of GME falling below $50 or rising above $275 in the next 12 months. Both are long shot scenarios, but they are realistic enough in this bizarre world.
We are in the middle of an important earning season. Last night, Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) stock moved 15% and 10%, respectively, in minutes. If these two stable icons can do that, then anything is possible for GME. Too much conviction in this environment can cost investors dearly. I am confident that we don’t know what we don’t know at this point.
There are too many variables like we’ve never seen before and on a global scale. When we face this much uncertainty, we should force ourselves to be more humble than normal. There is too much conviction from the GME fans and the haters. In the end, both extremes will suffer consequences they didn’t see coming.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.