The incredible news surrounding the GameStop share price has generated a surge in attention around mid-cap stocks. The short story is that the share price has risen from $20 to around $400 in one month. There are various reasons behind this incredible rise, not least the power of the retail investor.
As a retail investor myself, it gets me excited to try and find other stocks that have the potential to take off this year. I want to stay closer to home, so I’ll be focusing on FTSE 250 stocks.
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Impossible to replicate the GameStop share price move
The move seen in the GameStop share price this week was an exceptional event. Therefore, I’m not claiming to be able to buy stocks that offer those gains in that timeframe. However, I am looking for higher-than-average returns.
In order to try to beat the market, I’m looking at a contrarian investing strategy. That means I want to find undervalued companies, with a falling or low share price. I also want to identify stocks that are being shorted. But, buying a heavily shorted stock is risky, so I need to keep those risks top of mind.
The GameStop share price had 139% of short interest earlier this week. This meant that more than all the available shares (100%) were actually being used to short the stock. This is extreme, and I don’t think it’s sensible to be this aggressive when looking for stocks that are temporarily unloved. Among the top 10 most shorted stocks in the UK are Metro Bank and Royal Mail.
The main risk to me buying any of the above stocks is that the share price could fall. This fall could be sharper than with other stocks, as selling can intensify in a short time period. Even the GameStop share price experienced sharp falls in the past, before rallying higher.
FTSE 250 stocks to look at
Metro Bank is the most shorted stock at the moment in the UK, with short interest of 14.55%. The share price has almost halved compared to this time last year. However, I think that the share offers good value. For example, the bank recently sold £3bn of its mortgage book to NatWest Group. This offloaded debt and also boosted liquidity at the same time. The move ensured that Metro met its regulatory capital requirements, and meant that it didn’t need to raise more capital through added debt. Those are both positives. I’m still cautious about NatWest Group, though, given its accounting blunder in 2019.
Royal Mail is also in the top 10 most shorted UK stocks. However, the share price isn’t under as much short interest as the GameStop share price. It’s actually up 100% in the past year. I like the stock as the transformation strategy to focus on the growing parcel sector takes shape. The cost cutting of 2,000 jobs is expected to save £130m come March, which will boost liquidity. However, I am also concerned in that it will likely report a loss for 2020. It also has risk due to the stiff competition in the delivery market.
Yes, there is the risk of underperformance for both these stocks, as with any stock, but risk tolerance is very personal. Overall, I think Metro Bank and Royal Mail have the potential to surge higher this year, and I’m comfortable with their risks.