PreMarket Prep Stock Of The Day: GameStop

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

There are short squeezes and then there is the mother of all short squeezes. With that being said, Gamestop GME is the PreMarket Prep Stock Of the Day.

What Is A Short Squeeze? The phrase itself says it all. A short squeeze takes place when a stock or another tangible asset embarks on a major rally. As a result, investors who were bearish on the issue and took a short position willingly decided to buy back their shares to mitigate some of their losses.

On other occasions, the shares that are short are “called in” as the shareholders who own the issue want their shares returned to their brokerage firm. This creates a buying frenzy as the shorts are forced to cover in a rising market or run the risk of their clearing firm doing it for them to limit their exposure.

In addition, other traders that are fully aware of a high short-interest will go long the issue and make the shorts attempting to cover, pay higher and higher prices. GameStop short interest has been cited at over 90% of the float.

See Also: Massive Short Squeeze Sends GameStop Soaring 80%

Initial Activist: Activists that take a large stake in an issue can instigate a short squeeze on more than one occasion. In the case of GameStop, two activists have been goosing the rally. The first one being Michael Burry of Scion Asset Management, best known for predicting the bursting of the housing bubble in 2007-2008 and portrayed in the movie "The Big Short."

Burry’s original stake in the company was disclosed on Dec. 19, 2019, when he announced a 3 million share or 3% stake in the company. Its closing price on the previous day was $6.16, indicating that his cost basis was below that level. Also, he wrote a letter to the Board Of Directors encouraging them to continue with the share repurchase policy. Since that day, Burry has added to his position as well as taken some profits during its historic rally.

Chewy Founder Takes A Stake: On Aug. 28. 2020, Chewy co-founder Ryan Cohen, through his RC Ventures, took a 9% stake when he purchased 5.8 million shares ranging from $4.60 to $6.18. Over the next two trading sessions, the issue rallied from $5.38 to $7.65. It did retreat to the $6 area in mid-September before launching into orbit. Cohen has continuously added to his stake since his original investment.

Most Recent Discourse By Cohen: On Monday, Cohen once again upped his stake in the company when he disclosed he now had a 13% stake in the company. More importantly, Cohen was added to the Board of Directors along with two of his allies in order to have a greater impact on a strategic review of the company.

While Monday’s price action was somewhat expected, rallying from $17.69 to $19.94, the pause in the action on Tuesday, when it was higher by a penny, is not. The reason being, on Wednesday, the issue leaped from $19.95 to $38.65 and backed off to close at $31.40 on monster volume of 144 million shares compared with Tuesday’s volume of 7 million.

Double Top For Those Who Dare To Short: In heavy premarket trading, the issue peaked at $39.75. That marked the highest level for the issue since November 2016, when it tumbled from October’s closing price ($46.07) to $35.03. In December, it shed another $7, falling to $28.04.

There has been some profit-taking in Thursday’s volatile session. After a higher open, it came within a dime of Wednesday’s high, peaking at $38.55 and then retreated to $33.05. As of 12:15 p.m. ET it has rebounded into the $39 handle.

Discussion on the issue from Thursday’s show:

Disclosure: The author has a long position in shares of Gamestop.