Step aside GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC) is clearly leading the charge this time around. The so-called “meme stock” rally is back and these names are surging higher once again. However, will GME stock start to participate?
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Let’s not make any mistakes. GameStop stock has still done pretty well, up 63% over the past month. However, that severely lags the 427% gain we’ve seen in AMC over the same time. It even lags the 76% rally we’ve seen in BlackBerry (NYSE:BB).
But this isn’t a contest. Clearly there is still some short-squeeze potential in these names. Many companies have used this opportunity to raise a substantial amount of cash. GameStop has as well. Yet, the squeeze higher continues. What’s going on?
Trading GME Stock
Momentum is the key driver when it comes to these names. When GME stock and others garner bullish momentum, it puts the squeeze on investors that are holding the stock short.
When the short squeeze began in earnest, more than 100% of GameStop’s stock was sold short. How does that even happen?
In essence, hedge funds were betting against GameStop’s demise. They were selling short the stock without planning on ever having to buy it back. Or at the very least, were hoping to buy it back for pennies.
Of course, this created a massive overhang on the stock as it looked like bankruptcy was looming. When it turned out that GameStop was actually going to survive — it’s far from thriving, but at least it’s not dying — this created a huge opportunity for the bulls.
That’s because they could squeeze this stock higher with little effort. When funds and big investors piled in — buying calls and common stock — we saw both a gamma and a short squeeze. (Options market makers were forced to buy GameStop stock to hedge short call positions). It created a historic moment, really. But even though the rhetoric has toned down a bit, GME stock hasn’t.
On the other hand, short interest has toned down, which now sits between 15% and 20%. Despite this, GME stock has maintained between $250-$300.
Keep in mind, this has been a resistance zone for GameStop. If GameStop manages to consistently clear the $300 mark, GME stock could challenge the March high up at $348.50. In that scenario, bulls should see the $300 area act as support.
If GameStop can’t break out over $300 or gain momentum over this level, then the 10-day moving average is the first level of potential support. Below that puts the $210 to $220 area back in play, along with the 21-day moving average.
Is GameStop a Worthy Investment?
Some investors are just interested in making a quick buck with GME stock, AMC and other Reddit names. Others are wondering if this is actually a sound investment. After all, the company is making some positive moves.
GameStop wasn’t killed off during the novel coronavirus pandemic. At the time, physical retailers were forced to close their doors, hoping to ride out the storm. Many didn’t make it, while others have come out much stronger. There’s been a lot of disparity in the sector — and many thought GameStop wouldn’t make it.
To the shorts’ surprise, it did. Now, management is looking to put the pedal to the metal.
In late April, GameStop redeemed over $200 million in senior notes that had a 10% interest rate. The company also raised more than $550 million in fresh capital to bolster its e-commerce push.
Then GameStop announced CEO George Sherman would step down by July 31. Reshaping the board with Chairman Ryan Cohen — co-founder and former CEO of Chewy (NYSE:CHWY) — should allow for a more digital-first approach from GameStop.
With a new CEO focused on thriving in the e-commerce world vs. one that successfully steered GameStop through the pandemic (but focused on a bricks-and-mortar operation) is a solid plan. It’s the only plan that has a chance, most likely.
Unless GameStop shutters most of its stores and turns into a Dave & Buster’s (NASDAQ:PLAY) hybrid store, it needs a new approach. Cohen & Co. are just the ones to lead that charge.
Bottom Line on GameStop
With all that said, we’re talking about a company with a $18.5 billion market capitalization. That’s more than four times revenue for a business with relatively stagnant growth and no profitability.
I think GameStop can turn things around, but this valuation is pretty insane and hard to justify. As a result, GME stock is likely a better trading vehicle than a worthy investment at these prices. We’ll see how it trades in the near future as investors digest its earnings reported June 9.
On the date of publication, Bret Kenwell 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.