The SEC’s GameStop Report Shows Investors Believe in Its Recovery Story

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On Oct. 14, the Securities and Exchange Commission (SEC) released a report that tries to explain the saga that pushed up GameStop (NASDAQ:GME) over 10 times in price this year. For example, GME stock ended Dec. 31, 2020, at $18.84 and was trading for $208.64 by mid-day Nov. 18.

Retailers walk past a GameStop (GME stock) store in New York City, New York.

Source: Northfoto / Shutterstock.com

Moreover, at its peak closing price on Jan. 27, GME spiked to $347.51 — a massive 18x gain compared to its Dec. 31 price in less than a month.

The SEC report has some interesting points to make. The report is 44 pages long, but the GME story does not begin until page 15.

The surprising thing, though, is that the SEC does not pin the spike in GME stock on short-covering by hedge funds. The Financial Times reviewed the SEC’s conclusions and noted some of the facts and figures relating to the stock’s trading are “breathtaking.”

Short Covering Was Not the Culprit

For example, the number of people trading GameStop shares each day shot up to nearly 900,000 by Jan. 27. That is when the GME stock price peaked. In the last week of January, there were more than 100 million shares traded in GameStop. But here is what the Financial Times said about the SEC’s conclusions:

The SEC is not so sure that humbled hedge fund managers scrambling to unwind their bets really drove the stock higher, whatever the amateur traders believe.

Here is why they say this. On page 28 of the report, the SEC juxtaposes a chart of the volume of all short-covering trades against the total volume of trading in GME stock. This covers the period in late January and early February when the stock surged.

The chart, known as figure six and named, “Buying Activity of Traders with Large Short Positions in GameStop, Jan. 19 — Feb. 5, 2021,” is included here below. You can see that the orange area from short sellers is much smaller than the total buy volume in light blue.

The commentary from the SEC is also important. It said this about the short-covering in GME stock:

…such buying was a small fraction of overall buy volume, and that GME share prices continued to be high after the direct effects of covering short positions would have waned.”

In other words, hedge funds did not push up GME stock when they bought back their short positions. The stock was pushed higher by huge volumes from long traders.

What This Means For Investors in GME Stock

The fact is GME stock has risen because investors like its story. You have a new CEO, a new board, a new focus for the company and financials that seem to be turning around.

As I mentioned in my last article, GameStop is set to rebound if its third-quarter sales rebound. Moreover, it is very close to becoming free cash flow (FCF) positive. This will happen with just a slight increase in sales.

Analysts now expect GameStop to reach $5.67 billion in sales this year and $5.54 billion next year. That puts it on a price-to-sales (P/S) ratio of just 2.8 times this year.

Many other stocks have much higher P/S ratios than this. Moreover, once GameStop produces positive FCF it will probably move higher as analysts give it a higher rating.

As it stands, though, most analysts have much lower price targets for GME stock. Seeking Alpha indicates the average of four analysts is $37 per share, much lower than its price today.

TipRanks indicates that one analyst has written on the stock in the last 90 days. That analyst has a price target of $50 per share, still well below the $208.64 price from Nov. 18.

It should be no surprise that Wall Street is still negative on the stock. After all, virtually all analysts and hedge funds have gotten the story wrong up until now. The fact is retail investors pushed up the stock 1o times and have continued to keep its price high. So far, Wall Street is losing.

On the date of publication, Mark R. Hake did not hold any position in any of the securities mentioned (directly or indirectly) in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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