GameStop’s Freefall Is A Nonstop Disaster

If you’re trying to pick the worst meme stock, there’s plenty to choose from. But GameStop (GME) holds a special place among the biggest disasters — and it keeps getting worse.

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Shares of the struggling video-game seller are down a crushing 29% this year. And that’s just the tip of some major wealth destruction. Investors who plunked down $10,000 on the stock a year ago have lost more than half their money and have just $4,827 left now. And perhaps most painful is GameStop’s 78% plunge from its all-time closing high of 120.8 on Jan. 28, 2021. Shares Thursday traded for 26.18 apiece.

It’s just the latest reminder of how this former highflier just seems to be trapping naive investors. “A potential bottom for stocks on hopes that the Fed would provide more clues to the end of their tightening cycle provided a small window for a pump-and-dump move with GameStop,” said Edward Moya of Oanda last week.

“The rally for the video-gamer quickly faded after a trading halt. There doesn’t seem like a lot of support for continued support higher, so the parabolic trap might have a lot of retail traders on the wrong side of this trade.”

How GME Ranks In Terms Of Meme Disasters

GameStop isn’t the only colossal disaster among meme stocks.

It actually ranks as the 15th worst stock over the past year among the 24 stocks still in the Roundhill Meme ETF (MEME). The No. 1 disaster? Upstart Holdings (UPST) is down 94% in the past year. Had you dumped $10,000 into that stock, you’d only have $604 left.

And next worst? Struggling exercise bike maker Peloton Interactive (PTON). Its shares are off more than 90%, turning a $10,000 investment a year ago into just $917.

Why Did GME Stock Go Up?

Shares of GME stock surged 688% in 2021. Individual investors coordinated a buying spree in the video-game retailer’s shares using online message boards. The buying surge caught the “shorts” who were betting the stock would fall. These shorts faced unlimited losses unless they bought the stock, further fueling gains.

It was an inventive way to push GME stock higher.

GME stock ironically went up because it fell so much. And most people thought it would fall more.

Coming into 2021, GME shares had lost a third of their value over the previous five years. Investors betting the stock would fall, the shorts, controlled GME stock shares in late 2019. That overly bearish bet set up a perfect environment for a massive short-squeeze rally.

Additionally, Chewy (CHWY) founder Ryan Cohen bought the stock and joined its board as chairman. And the stock is also in the S&P Midcap 400. So the rise forced institutions tracking the index to buy the stock.

The company is trying to restructure itself to reposition for the digital era. Traders bet the company can remake itself. That might materialize as some kind of digital video-game purchasing system, like Apple‘s (AAPL) App Store or Valve’s Steam. Additionally, some hope the company will pivot into popular online game streaming. Amazon.com (AMZN) is finding success there with its Twitch service.

Can You Trade GME Stock?

Yes, you can trade GME stock, but be careful. The stock is now available for trading at all major brokerages.

There are caveats, though. Given the intense volatility in GME stock, some brokerages like Robinhood limited some transactions in GME stock earlier last year. At one point, investors could only sell shares of GME stock they owned and couldn’t buy more.

Also, since GME stock is highly volatile, some stop-loss selling and buying may not work as you’d expect. The stock can be halted on extreme volatility. Also, if you set a limit order, it might not execute at your price if the stock moves too fast.

Why Is GME Stock Volatile Now?

GME stock is rising as investors think it can pull off an amazing business turnaround. GameStop is seen losing money in 2022, 2023 and 2024, a big blow to the fundamental story of GameStop.

Meanwhile, many of the forces that propelled GME stock aren’t as strong as they were. Shorting activity is down sharply — as short sellers see the risk of their moves and pull back. Shorts only control 17% of GME stock now, says S&P Global Market Intelligence, down from roughly 90% in early 2021. That’s still higher than the typical low-single-digit short position, but nowhere near what it was.

Additionally, much of the “good news” on the stock, like Cohen’s involvement, is already priced in. Cohen is now the largest holder of GME stock, with 36.4 million shares or roughly 12% of the company. And many analysts continue to tell investors to “sell” as they see the company unable to compete in a new world of digital game distribution.

Wall Street analysts who follow the stock closely warn it’s worth much less than retail investors think it is. The average 12-month price target is just 16 a share. If they’re right, that’s nearly 39% potential downside from its current price of 26.38. The four analysts following the stock rate it “underperform” on average.

GME Stock Recent Quarterly Report

GameStop’s most recent quarterly report dashed more hopes. On Sept. 7, the company reported third-quarter revenue of just $1.14 billion, missing estimates by 10%. The company also continues to lose money. It posted a quarterly loss of 35 cents a share. That was a slightly smaller loss than expected.

It’s another weak quarter following years of decline. The company’s EPS growth rate started falling consistently in 2017 and turned into outright losses for fiscal 2021, which ended in January. Meanwhile, sales posted an 18% annualized drop in the past three years.

Interestingly, GME stock’s consumer electronics retail group is weak too. It’s ranked 196 out of 197 groups, says IBD’s Stock Checkup.

GME Company History

GameStop used to hold an important position in the video-gaming industry. It was the spot to buy the latest video games and consoles.

The company, based in Grapevine, Texas, turned stores, usually in malls, into hubs for gamers. You could always get your hands on just-released games. But more important, you could save money by trading games you were bored with for new or used ones. By being a used-game bazaar, GameStop remained relevant even with competition from Amazon, Walmart (WMT) and Target (TGT).

Back in 2016, GameStop ran 7,117 stores. And in the 12 months ended in January 2016, sales at stores open at least a year rose 4.3%. But now many people just download games to their phones or computers. Now GameStop runs roughly 4,500 stores.

Fundamentals For GameStop Stock

GME stock’s fundamentals are a story of steady decline.

Analysts think the company will lose $1.37 a share, or $425 million, in fiscal 2023. That’s actually worse than last year’s loss of $1.14 a share. And revenue should inch up 4% to $6.3 billion.

But analysts think the company will lose $268 million in fiscal 2024. Revenue, too, is seen flatlining at $6.5 billion. GameStop’s top line is benefiting from sales of high-demand, next-generation Xbox and PlayStation consoles. These products, though, are sold at low profit margins.

Such weak fundamentals explain why GameStop stock’s EPS Rating is just 1 out of 99. That means its fundamentals are weaker than 99% of all other stocks. Typically, leading stocks start sustainable runs when their EPS Ratings are at or above 80.

GME’s fundamentals are so weak, they dilute its IBD Composite Rating, which gauges a stock’s technical and fundamental performance. GME stock’s Composite Rating is just 8. That means it’s lagging 92% of all other issues.

When choosing growth stocks for the biggest potential gains based on the CAN SLIM investment paradigm, your chances of finding a true market leader improve when you focus on those with a Composite Rating of 90 or higher. Shooting for a 95 or higher, particularly at the start of a new bull market, is even better.

Technical Analysis Of GME Stock

GME stock’s amazing run in January 2021 was epic. And it explains why the stock carried a perfect 99 IBD Relative Strength Rating last year. The RS Rating compares the stock’s price gains against all other stocks. Typically, top stocks carry RS Ratings of 80 or higher. The RS line, drawn in blue, compares a stock or ETF’s moves against the S&P 500.

When a stock breaks out of a new base, investors prefer to see the RS line also running to new high ground. This strongly suggests that a stock is now outperforming the general market.

GameStop stock has lost all its strength. Shares are still down hard this year, pulling the relative strength rating down to just 29. And an analysis on MarketSmith shows a volatile RS line. That’s a clear sign of how it’s failing to keep its technical leadership position.

On the positive side, GME is finding support at its 10-week moving average of 26.45. If GME can stay above it, that might be a sign it is a speculative play for a small position.

Control Your Risk: Position Sizing

As always, control your risk. Not all breakouts work, especially when the stock market uptrend is under pressure. The best time to buy? When IBD notes the stock market in a confirmed uptrend, it signifies that buying demand is healthy among institutional investors.

Savvy traders know it’s much wiser for a stock to consolidate for weeks and then break out. That’s your sign this could be a sustainable winner. GameStop stock doesn’t qualify yet. It’s still a stock for gamblers.

And yet, GME finding of support at the 10-week line might make the stock a highly speculative play for those who believe in the turnaround. It’s just all the more reason not hold too many shares and subject your portfolio to excessive risk.

Swing trading is all about taking quick gains and keeping losses small. If you combine that with proper position size it can lead to impressive performance.

For SwingTrader performance, we use a model portfolio. To keep things simple, eight full positions of equal weight put us at 100% invested. It’s a number suggested by IBD Founder William J. O’Neil in his book “How To Make Money In Stocks.” That means a full position starts out at 12.5%.

Is GameStop Stock A Buy?

GME stock is exciting for sure. And it has been a short-term speculative winner in early 2021. Many investors who were in GameStop stock early clearly won big.

But that’s ancient history now. What matters now is looking ahead to what’s next. And there the picture is less clear. Fundamentals are challenging at best. And the chart is volatile and lacks a clear buy point.

It’s fine to watch this as a sign of speculation in the market. But when looking at long-term winning stocks, you can do better. But if you’d like to speculate, make sure you don’t bet too much and don’t forget the golden rule of investing. Cut losses short so you can find and invest in the next big winner.

Remember that investors who make money over the long term own companies with strong profit, not just surging stock prices.

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Follow Matt Krantz on Twitter @mattkrantz

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