Profit Pregame

Massive Gains in a Stock Wall Street Least Expected

A failing video game retailer stock is suddenly soaring. But will it be able to keep its gains?

What’s happening?

Over the last few trading days, one of the craziest things I’ve ever seen in the markets has been the talk of Wall Street.

GameStop Corp. (GME) – by most accounts a struggling company with a severely depressed stock price – skyrocketed over 228% between Friday’s open and Monday morning.

GameStop’s stock has been in a steady decline since 2013 as the gaming industry has evolved to a more digital experience. More and more gamers have begun purchasing and downloading games directly from the developers – without having to drive to the store to buy the game disc.

As a result, GameStop has been forced to close more than 1,400 stores in a two-year span.

So why is a company that looks like the next Blockbuster suddenly seeing its stock price go to the moon?

The answer is almost stranger than fiction…

Where’s the money?

Traders have seen the writing on the wall for GameStop for years now. Its antiquated business model has led to massive short selling. Even as the stock climbed on Friday, 140% of GameStop’s float was still shorted.

The cause of the gargantuan boost to GME stock is a movement among retail investors that gained steam on the popular internet forum site Reddit.

After announcing that Ryan Cohen – co-founder of Chewy Inc. (CHWY) – would be joining its board of directors, GME stock began trending upward earlier this month. That prompted Citron Research to predict last week that GME shares would drop back down to $20.

Users of the Reddit forum called WallStreetBets rebelled against Citron’s forecast and began buying up shares of GME.

And it’s created one of the biggest short squeezes in memory.

GameStop bears are out more than a billion dollars, while those that jumped into the GME buying frenzy stood to make once-in-a-lifetime type profits in less than two trading days.

So, is this something you should be jumping into as well?

While it may be tempting, here’s why I think your answer should be a resounding “No.”

How do I get some?

GameStop might be the most overbought stock I have EVER seen in my life.

In the long-run, there are valuations and P/E to be considered – and will ultimately determine the stock’s price. But in the short-term, it’s a supply and demand curve between buyers and sellers.

Short sellers have taken advantage of the system for too long by announcing their positions and driving the stock down. Well, now they are getting a taste of the poison.

In the end, GME stock and all of these kinds of overinflated stocks will all go down, it’s just a matter of time.

This extremely volatile situation might be one you’re better off avoiding entirely.

But if you do want to make a play on GME though, I would rather be a seller than a buyer on these kinds of overbought stocks.

But Volatility Can Sometimes Be Your Friend

GameStop’s 228% rise wasn’t the only big jump we saw over the weekend…

In fact, the microcurrency market as a whole experienced a spike.

My friend and colleague Tom Gentile has been predicting that microcurrencies will have a banner year in 2021, and so far, he’s been on point.

This year, Tom has given the readers of his Microcurrency Trader research service the opportunity to close out 12 winners out of 15 positions – an 80% win rate.

Best of all, the overall average profit (even including the few losing positions) was over 84%!

If the rest of the year looks anything like January has, you’ll want to get on board before Tom’s next round of recommendations in Microcurrency Trader.

In the Spotlight: Gauging the Future of Homebuilder Stocks

Homebuilder stocks have been on a tear since the March 2020 lows.

With a wave of prospective buyers looking to flee highly populated areas amid the COVID-19 pandemic, demand for housing in suburbs has outpaced supply. Record low interest rates have made home ownership a real possibility for millions of Americans, too.

That’s led to a glut of new home orders, and homebuilder stock prices have continued to climb, even in the face of rising materials costs.

D.R. Horton, Inc. (DHI) reports its last quarter’s earnings today. Its results and forward-looking statements will tell us a lot about the health of the broader industry.

I’ll be taking a good look at what the report has to say about continued growth in new home purchases, and I’ll be back with some of my favorite investments in the homebuilding space.

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