Just when I think the remarkable story around the GameStop (NYSE:GME) share price is over, there comes another twist in the tale. The stock jumped 47% yesterday (6 June), taking the rally over the past year to 78%. The sharp move in just the past couple of weeks means that some retail investors are making a large amount of money, but I’m not sure I’m going to join the party.
A rapid rally
The most incredible retail investor gain I’ve seen was posted yesterday by Keith Gill (known online as Roaring Kitty). He posted showing his account online, owning 5,000,000 shares at $21.27 and Call options at $20. Call options are a form of financial derivative where you pay an upfront premium to have the right to purchase a stock at a particular price. If I purchase the option at $20 and the share price gains, I profit. If it falls, I just lose the premium paid.
Based on the move yesterday and where the share price is likely to open today, Keith Gill would be worth a billion dollars just from his GameStop shareholdings. That’s a figure I think few of us would even contemplate making from the stock market over the course of a lifetime, let alone the past month.
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Even though Gill is the one making the headlines, I’m sure there are others like him that have made huge gains due to the sharp spike in the stock price of late.
Speculation versus fundamental value
I don’t want to sound bitter, as I’m very happy for Gill and others like him. However, it can give a false impression to newcomers about how to invest in the market.
From what I can see, Gill invested pretty much all of his money in just one stock. That means it’s an all-or-nothing play. There’s no diversification in his portfolio that would help him if the share price fell.
Further, I’d classify this as purely speculative trading rather than investing based on fundamental principles. The share price hasn’t rallied based on strong earnings, a bright outlook or new partnerships. In fact, the 2023 results showed that net sales fell from $5.9bn the previous year to $5.3bn.
It recorded net income of just $6.7m, which is rather incredible based on the current market cap of $14bn. There’s a clear disconnect between how the business is performing and the stock movements.
Not for me
In my view, this shows that GameStop price swings are being driven by speculative buyers and sellers. As a result, I think it’s too high-risk for me to get involved. There’s little rational reason for me to buy at $46 now based on where I think it will be in a years’ time.
So even though I take my hat off to Gill and co, I think we all need to remember that for every billionaire made, many more might end up losing money.
