The conditions that created the GameStop stock price spike appear unlikely to be recreated, especially among the larger and better-positioned publicly traded companies in Memphis, analysts say.
Shares of GameStop surged in price in January after individual retail traders, influenced by the Reddit group r/WallStreetBets, began buying up the stock. The frenzy was an apparent bid to force hedge funds that heavily shorted the stock — betting that its price would fall further — to either buy shares at a loss before the price climbs higher or incur significant losses.
This spike in activity, which drives up the stock price even more, is known as a short squeeze. There are signs that competing institutional investors, not just retail traders, were active participants in the GameStop short squeeze, CNBC reported.
Dave Sekera, chief U.S. market strategist at Morningstar Research Services, said GameStop’s market capitalization, or value of its outstanding shares of stock, is relatively small. This means it didn’t take as much activity to push the stock price up as it would for larger companies.
“Of course, once that stock price started going up, it became a self-fulfilling cycle in the short term,” he said.
GameStop’s stock had been struggling amid the COVID-19 pandemic and the longer-term shift toward buying video games online. The stock, which had a 52-week low of $2.57 a share, climbed as high as $483 a share during the short squeeze. It’s cooled off since, trading at $50.80 as of Tuesday morning.
Pauline Bell, an equity research analyst at CFRA Research, said GameStop stock presented the “perfect storm” for a short squeeze. The trading activity has prompted scrutiny from members of Congress, a review from financial market regulators and broader questions about the stability of the stock market.
Stats suggest Memphis companies safe
Could the GameStop stock frenzy spread to Memphis-based publicly traded companies like FedEx and AutoZone? Statistics say it’s unlikely, according to Bell.
One metric analysts keep tabs on to determine the risk of a short squeeze is short interest as a percentage of float, or the shares available for investors to buy.
“Normally, fundamentals drive price, but when the short interest is so large, there’s a good chance of a short squeeze,” Bell said. “When the (short interest as a percentage of float) number is 15% or higher, you have to be careful.”
According todata from CapIQ, an S&P market intelligence platform, GameStop’s short interest as a percentage of float is 132%.
GameStop’s short interest has likely dropped since the initial surge — CapIQ’s statistics are updated twice monthly. Still, the interest is significantly higher than what Memphis companies FedEx (1%), AutoZone (2%) and International Paper (2%) are seeing. Yahoo! Finance has Terminix’s short interest as1.83% of float.
Other companies with high short interest, per CapIQ, include National Beverage Corp. (83%), Dillard’s (72%) and Bed Bath & Beyond (69%). Bell isn’t sure if retail investors on Reddit and other social media platforms will be as enthused about investing in other companies with high short interest as they were with GameStop.
“There was a cross pollination on Reddit of people who were active gamers and now active traders,” she said. “… Can you generate that type of momentum where millions of people are buying stock in Macy’s? Probably not.”
Sekera also said a short squeeze to the degree of GameStop’s is “probably unlikely,” as hedge funds and other investors have pared down their short interests since the GameStop chaos. For the Memphis companies in particular, large market capitalizations reduce their risk for such an event, he added.
Memphis stock prices climb during COVID-19
Beyond recent statistics, analysts view GameStop’s long-term future as tenuous. Memphis’ publicly traded companies — FedEx, AutoZone, Terminix and International Paper among them — are viewed more favorably.
As of Tuesday morning, all four of those companies' share prices were higher than they were a year ago, according to Yahoo! Finance.
FedEx, Memphis’ largest company, has posted a string of strong quarterly results as home delivery volumes have leaped during the pandemic.
Higher operating costs bit into International Paper’s most recent quarterly results. However, Matthew Miller, another CFRA Research analyst, said he expects International Paper’s industrial packaging segment, the company’s largest, “to benefit from broad-based demand recovery, leading to (earnings per share) growth of 35%.”
For AutoZone, Morningstar equity analyst Zain Akbari said in a stock analysis that the COVID-19 pandemic “had led to a spike in DIY sales, a segment which is AutoZone’s forte.” He added that the company should benefit from commercial sales recovering and the long-term uptick in vehicle age.
“While AutoZone has been slow to fully embrace the dual-market approach that is increasingly a hallmark of the national retailers, we believe its management team’s measured approach and consistent focus on returns should leave the firm in a strong position to weather change,” he said.
Max Garland covers FedEx, logistics and health care for The Commercial Appeal. Reach him at max.garland@commercialappeal.com or 901-529-2651 and on Twitter @MaxGarlandTypes.
