Gamestop: What Was Supposed to be a Flip Play Turned Into So Much More

A year ago, I bought GME shares to flip. I became an “ape” after learning of market manipulation, short seller attacks, and that Gamestop has an incredible future with promising fundamentals.

Any good stock trader will reassess their stock portfolio from time to time. Typically, long-term trade decisions are made quarterly or yearly, often tied to a company’s earnings, quarterly or annual reports. Of course, if a stock jumps in price or declines significantly in a short amount of time, an immediate assessment is warranted.

After Gamestop’s third-quarter earnings call last month, I went through a mental reassessment of Gamestop. I was unsure how involved I wanted to be in the retail trader (small investor) fight against short sellers and whether I would continue accumulating Gamestop (GME) shares. I devoted an exorbitant amount of my time on Twitter, Reddit, and Discord; reading, writing, and talking about GME. There was no “strategic transformation” or dividend announcement during the call. Earnings per share (EPS) was still negative. Add to that, GME’s price dropped over 30% the previous 12 days.

I never thought of selling my GME shares, the ones I registered directly with Gamestop’s transfer agent, Computershare. I have no plan to sell those unless there is a significant rise in the share’s price. Extreme dips and surges in the stock’s price were common, as well as the feelings accompanying them, ranging from intense joy to rock-bottom disappointment. Take one look at the one-year chart, and you will understand what I mean.

I’ve stuck it out based on my belief Gamestop stock is undervalued and heavily shorted. Mark Cuban coined it perfectly in February when he said this about holding or selling Gamestop:

“You certainly hope it goes back up. But stocks don’t always move on the timetable you want. If the reason for your purchase is still valid, why would you sell if you can afford to hold it?”

Thinking back to the earnings call, I really wanted something, like a reward for helping save the company from predatory short sellers and riding this crazy train for a year. Instead, it was like I got one of those t-shirts that says, “Grandma went to Florida and all I got was this lousy t-shirt.” In this case, the t-shirt would say, “I helped save Gamestop for the past year, and all I got was this lousy t-shirt.” This wasn’t the first time I felt this way. I felt this way no less than 10 times this past year. But, I’ve never given up hope for Gamestop. I always break free with optimism.

Gamestop Was Supposed to be a Flip Play

I began my Gamestop investment journey on February 1, 2021, after hearing of the stock’s price surge from my son. I bought a fractional share as I was erring on the side of caution and cash poor. My original intent was to flip the stock at a higher price, an arbitrage move, though I had no clue at the time what arbitrage meant. I attempted to buy GME two days prior. However, as many traders know, most brokers temporarily banned the ability to purchase GME and dozens of other stocks. You could sell GME. You just couldn’t buy it. Sounds messed up? It was.

No sooner did my fractional share appear in my account did the price plummet. It was a sickening feeling, watching my investment disintegrate. It was my first shot at stock trading in over a decade and I blew it. However, instead of selling at a loss and giving up, I immersed myself in reading due diligence (DD) on why GME’s price rocketed and the buy option was removed. Namely, the stock was heavily shorted by Melvin Capital, a hedge fund, and was facing monumental losses due to the GME’s price surging.

GME developed a cult following. Shareholders held onto their shares to stick it to the man, fight corruption and help ameliorate the unbalanced wealth in the U.S. In 2020, Time magazine published an article, The Top 1% of Americans Have Taken $50 Trillion From the Bottom 90% — And That’s Made the U.S. Less Secure. This statistic came from a Rand Corporation, a think tank research company, economic study. According to the study, we are getting fleeced:

“On average, extreme inequality costs the median income full-time worker about $42,000 a year. Adjusted for inflation using the CPI, the numbers are even worse: half of all full-time workers (those at or below the median income of $50,000 a year) now earn less than half what they would have had incomes across the distribution continued to keep pace with economic growth.”

Can you imagine how much worse this is since 2020 with the inflation explosion? Admittedly, I became obsessed with GME’s “justice to the little people” story and bought into the get-rich-quick fantasy of a massive short squeeze, aka MOASS (mother of all short squeezes). In theory, during a short squeeze (aka gamma squeeze), short sellers would have to close their positions and honor the shares they loaned out. Shares would be scarce if I held onto my shares. GME’s price would multiply exponentially. Ok, it does sound naïve. But, in a perfect world, I’d make some loot. I fantasized about sharing my wealth with my adult sons, elderly parents, and my partner, who has stood by me during GME-induced mood swing episodes. He even bought four shares to support my dream.

Today, I have a much different thought process on what GME shares could be worth. The more I read, the more I do not trust the market. I do not trust Wall Street’s bad players. The advocate in me wanted justice and wealth equality for all citizens. At the very least, I wanted the stock market to change. Wanting to fight for the underdog, I became an “ape.” Some GME shareholders call themselves apes as the financial media labeled us as unrefined idiots, who knew nothing about the stock market. We were portrayed as having the maturity and intelligence of five-year-olds eating crayons who were attempting to destroy the stock market. We have been criticized for believing in Gamestop, for wanting the company to succeed. Mainstream financial news outlets rarely post positive stories about Gamestop, seemingly in revolt against the ape movement. It appears they do not like us or any company that is heavily shorted. This was my motivation for writing this article.

Why Was the Buy Button Suppressed?

On October 14, 2021, the Securities and Exchange Commission (SEC) released its much-anticipated Staff Report on Equity and Options Market Structure Conditions in Early 2021, aka “The Gamestop Report.” The report was half academic banter, half anecdotal assumptions. Its purpose was to formally explain January’s price surge and trading restrictions following the SEC’s investigation. Short sellers owed millions of shares at a much higher price than when they shorted or lent out the shares. It’s the opposite of how retail traders traditionally invest. Instead of owning shares of stock, short sellers owe the stock to the market. Short sellers want stock prices to go down. Wouldn’t you rather owe $50 than $100?

Typically, shorting is used to hedge call options or long positions; and provide liquidity in the form of loaned shares to market participants. Shorting isn’t necessarily bad when its purpose is to hedge or provide liquidity. However, excessive predatory shorting occurs and is detrimental to companies and retail traders. Some call it a bear raid. Though bear raiding, shorting a company with the intent to drive the price down, is illegal. Seasoned traders can point them out using technical analysis of stock charts. When share prices are artificially pushed down through shorting, it affects a company’s market capitalization and ability to attract investors. Add to that the psychological phenomena that people panic sell. If the price is tanking, some traders jump ship in fear the stock is a sinking ship. Predatory short-sellers salivate over panic selling. One of the most critical actions a trader can take when a stock’s price is dropping is no action, patience. Most stocks go back up over time.

In January, GME’s short interest, the percentage of shorted shares above the stock’s float (total of shares available after subtracting insider and institutional holders), was very high at over 100%. That meant double the number of shares were circulating than there should’ve been. Various brokers and financial services posted different short interest percentages. There were no agreed-upon, accurate short interest percentages for GME. This is a huge problem I’ve encountered with trading. The U.S. stock market data isn’t consistent, timely, or accurate. Some information is hidden behind very expensive paywalls, which only large firms or the wealthy can afford.

The SEC concluded in its report there was no evidence of shorts covering the millions of shares that would’ve elevated the price as much as it did; since data pointed to retail traders’ buying as the cause of the price increase. Short interest went down, but that did not coincide with shorts covering. The bombshell for me was the SEC stated January’s events did not constitute a short squeeze and they weren’t privy to naked shorting information. I believe shorts never covered or entirely closed their GME positions and have been kicking the can, manipulating the market, to keep GME’s price low. Apes have long believed market makers have used naked shorting, fake/synthetic shares, to keep the price down, especially in January. Short sellers are allowed to manipulate a specific stock all they want. It is perfectly legal to try to short a company’s stock to near-zero as the end goal.

Apparently, no one knows the exact number of GME shares shorted in January or today. This is mind-boggling, considering the U.S. stock market is touted as open and transparent. The SEC has acknowledged the U.S. stock market is opaque.

The buy button was suppressed, according to the SEC, due to the central clearing organization (DTCC) suddenly imposing an enormous margin requirement from its members (brokers, market makers, banks) for GME and several other heavily shorted stocks. There was no logical rationale for this other than big players wanting to halt retail traders’ buying power. I’ve witnessed other stocks’ prices surge this past year with no limitations other than standard momentary halts.

Most telling was the SEC’s admission that they knew little about why this occurred and aren’t privy to the inner workings of market makers’ internalized trades. In January, over 60% of GME trades were traded in the stock market’s version of a back-alley, not on the “lit” (yours and mine) exchange. This trading method can be used to manipulate a stock’s price and keep transactions hidden. Even today, about half of GME trades are off-exchange, as evidenced in the Financial Industry Regulatory Authority’s (FINRA) alternative trading and over-the-counter (OTC) reporting metrics. FINRA is the self-regulatory arm of the U.S. equities market. Self-regulating means we leave it up to the stock market’s bad players to police themselves. It is equivalent to a law saying you and me are our own cops. We must issue a speeding ticket to ourselves. Would you? I wouldn’t.

I Learned to Hold and Not Panic Sell

With every little bit I could save, I bought whole GME shares, though the price did nothing but decline. At one point, it dipped to $38.50 from an all-time high of $438 a few weeks prior. To my complete surprise, on February 24, 2021, the stock jumped to $91.71. The next day saw a high of $184.68. I was in the green! Ok, I’ll admit it felt like winning a scratch-off ticket. The financial media portrayed Gamestop as a lost cause, but the apes were proven right. I firmly believed we hadn’t seen the height of a GME short squeeze, the MOASS. I didn’t sell.

I continued to accumulate more GME shares and general stock trading knowledge. There have been five or six mini-squeeze cycles in 2021. In June, GME rose to $344. August and October saw 25–30% dips in the stock, only to increase again by 25–30%. I am not going to lie. It was painful to watch price surges and not sell my shares, especially when I desperately needed the money. While day and swing traders made serious loot, I sat with my GME shares, believing in this company but was very broke. I know I am not the only ape in this situation. Inflation has beaten me with a two-by-four. I wanted to throw my coffee mug at the tv every time I heard Jerome Powell, Federal Reserve Chairman, say this inflation thing is transitory while putting in zero measures to contain the inflation wildfire.

Two months ago, I decided to direct register (DRS) my GME shares with Computershare, Gamestop’s stock transfer agent. I legitimately worried the same thing would happen as in January. The SEC has never said such trading restrictions will never happen again. Brokers, market makers, and the DTCC can pretty much do whatever they want. The SEC reminds us in social media posts and on their website to be aware of the risks in stock trading, specifically, “don’t end up a victim of market manipulation.”

Err, why not arrest and prosecute market manipulators rather than warn the little guy about shady practices? If they know this is happening, why does the SEC even exist? Why are the cards allowed to be stacked against retail traders? For example, I get a pop-up message every time I buy GME, warning me it is a risky stock and “hard to borrow.” Although it costs short sellers and big investment firms <1% to borrow GME shares on margin, retail traders must have 100–300% collateral to borrow GME, with most brokers. At this point, there is zero reason for this outright discrimination against GME…if the shorts actually covered.

I first learned about direct registering shares from other apes on Reddit. Apes were direct registering their shares to expose the suspected millions of synthetic shares currently in circulation. A mass exodus of GME shareholders from traditional brokers to Computershare removes shares from the DTCC’s shortable pool. Per Gamestop, there were five million shares directly registered with Computershare through October 30, 2021. The float is around 62.49 million. Therefore, over 57 million shares still need to be registered to set off alarms. Apes post their DRS account screenshots on Reddit every minute of every day.

Of Course I Am Still In It!

After thinking it over for a few days, I came to my freaking senses. I am not going anywhere. I am taking Mark’s advice. I will continue to invest in Gamestop, but as a long-term investment strategy, based primarily on fundamentals and the potential of this company. If me investing in Gamestop creates a short squeeze that exposes market manipulation and effects change in the market, then that’s great too. Here is why I like Gamestop long-term:

1. Gamestop’s talent pool. The author of gmedd.com publishes a thorough, updated spreadsheet of Gamestop’s new executive hires, their previous positions, and LinkedIn accounts. One glance and you will see the incredible talent exodus to Gamestop from companies like Amazon, Chewy, Zulily, and Loopring (an Ethereum-based crypto platform). Ryan Cohen, the Chairman, was successful with creating Chewy and is obsessed with customer satisfaction. Matt Furlong, the CEO, was Amazon Australia’s CEO. The blockchain/NFT hires are impressive, from the high echelons of crypto.
2. Sales are up 29% from 2020, despite supply chain issues and short seller attempts to ruin the company. Sales were $1.297 billion, compared to $1.005 billion in the prior year’s third quarter.
3. Negative EPS is ok. I learned that merchandise inventory for the distribution centers is a big reason earnings per share was negative though revenue beat the $1.19 billion estimate. GameStop’s EPS came in at -$1.39 versus $-0.52 expected. This is normal for a company that is rebuilding.
4. Gamestop and Loopring are collaborating on Blockchain, NFT, and Web 3.0 projects. Gamestop is creating an NFT marketplace. There hasn’t been a formal announcement. But, you can’t hide certain things in the crypto world. Last week, Gamestop’s NFT site issued a call for creators. Gamestop will compete with Opensea.io, which recently surpassed $10 billion in all-time revenue since it opened in early 2018. Through its Loopring collaboration, GME could enter the world of Web 3.0 gaming on blockchain using decentralized finance. Gamers can earn money as opposed to gaming providers earning money.
5. Gamestop has $1.4 billion cash on hand. Gamestop is essentially debt-free, except for one COVID-related low-interest loan from France.
6. New better credit revolver. Around October 2021, they signed off on a new $500 million global asset-based revolving credit facility with a syndicate of banks, better terms: reduced borrowing costs, lighter covenants, and more flexibility.
7. Customers come first. Gamestop is doing an incredible job with marketing and ensuring customers are satisfied with their purchases. Its social media presence is highly interactive and geared to help customers. They have a phone number too! Many large companies have tossed out phone contact. Try finding a phone number and attempt to reach Google or Amazon for anything. It is a nightmare. Not everyone likes chat features, especially older customers. Ryan Cohen was “customer-obsessed” at Chewy and is doing the same at Gamestop.

With all the positives, there are a few things I’d like to see happen. Apes have been calling for an NFT or cash dividend. It’s time. I’d like to see more streamlining of its brick and mortar stores, consolidation of stores, and/or other means of attrition. Use cost savings to boost worker pay and benefits. I’d like more information on strategic transformation initiatives. Ryan Cohen posts cryptic tweets, which were fun to decipher. Many were about poop. Maybe the NFT marketplace will be called Poop, doo doo, poo, or dookie. However, as fun as they’ve been, I am beyond the puzzles and ready for reveals.

Overall, Gamestop’s leaders are doing a phenomenal job tackling the rebirth of a once-struggling brand and short seller’s target. I will continue with my GME obsession, indefinitely.

After writing this piece, a video went viral of veteran hedge fund manager, Charles Gradante, speaking at a corporate governance event in Palm Beach, FL. He vocally confirmed what apes have been saying for a year about January’s events…that there was naked shorting, the buy button was suppressed to favor short sellers, and the SEC does not know how to fix it.