So, what happened to GameStop (NYSE: GME)? If you look at the stock price graph, it looks like Mount Everest in a desert. In its 19 years of trading, never did the stock cross the US$60 mark. And then came WallStreetBets. Redditors surrounded the stock with buys, and in 15 days it soared from US$19 to US$483 and back to US$53. This mountain was insurmountable for fundamental investors, as this was the game of a short squeeze. What is the next stock pick of Redditors?
Why Redditors chose GameStop
As GameStop was a game of trade, you need to look at the technical indicators of the stock. It is a low-traded stock with negative earnings per share (EPS) and negative enterprise value/EBITDA. No fundamental investor will buy GameStop stock after looking at these indicators. But hedge fund managers find opportunities in such stocks. They extensively use short-selling to profit from the dip in stock price.
Redditors target such stocks. If hedge fund managers bet on a decline in a stock but the stock rises, they lose money. To hedge their losses, they have no option but to buy the stock at a premium.
How to read GameStop’s short squeeze on a stock price graph
It will get a little technical, so brace yourself. Redditors started buying Gamestop stock by placing exorbitant bid prices. For instance, on January 22, the stock closed at $65. Redditors put the bid price for the next day at as high as $96 — a premium of 48%. That is how they increased the stock price from $43 to $150 in four days. How do I know that this was the Redditors? The trading volume on GameStop surged from 57 million to 197 million.
Redditors are retail investors. Hence, their trades appear in volumes. When institutional investors like hedge funds trade, they buy stocks under a bulk trade mostly for a premium. You can identify their trade, because the trading volume will be low but the stock price will rise.
That is what happened with GameStop. On January 27, the stock opened at $354.83, which is 140% above its previous day’s close of $147.98. That day, its trading volume was just 93 million. The low volume was also because Robinhood and other brokers blocked buying for retail investors.
Finding the next GameStop
Looking at Gamestop’s fundamentals, you can try and decode the next target of Redditors. I believe Facedrive (TSXV:FD) stock fits the bill. The stock began to show exponential growth just after the Gamestop fury cooled.
Like GameStop, Facedrive also has low trading volume, negative EPS and enterprise value/EBITDA, and all other indicators that make it a short-selling target. When the GameStop game was going on, Facedrive stock surged 70% between January 21 and 26, while the trading volume did not surge that much. The same trading trend repeated between February 4 and 6.
There was over a 10% gap between the previous day’s closing price and the next day’s opening price. Moreover, after the three- to four-day rally, the stock price dipped. Facedrive’s momentum gets me to two conclusions.
- Either WallStreetBets is targeting Facedrive less aggressively after their full-fledged war against hedge funds backfired a little when brokers banned them from buying GameStop;
- Or there is another Reddit group trying to recreate GameStop’s gains.
These are purely my assumptions, as there is no other logical explanation for the Facedrive stock price rally. It is a company with little substance.
Investor takeaway
If my theory is correct, Facedrive stock will see some significant upside for the next two days and then fall for the other two days. As a fundamental investor, I recommend you stay away from the stock, as it is not worth $50/share.
But if you want to try momentum trading, you can try buying two stocks of Facedrive when it falls to around $40-$42 and sell above $50. But trade with caution, as it is a gamble.
