"GameStop effect" could ripple further as Wall Street eyes short squeeze candidates

N Citron

28/01/2021 18:25

By April Joyner and Saqib Iqbal Ahmed
    NEW YORK, Jan 28 (Reuters) - The clash between retail
traders and Wall Street professionals that sparked roller
coaster rides in the shares of GameStop Corp  GME.N  may pose a
risk to dozens of other stocks and potentially create a headache
for the broader market, analysts said.
    Market watchers identified dozens of stocks potentially
vulnerable to extreme volatility after a buying spree from an
army of retail traders in recent days prompted hedge funds to
unwind their bets against GameStop and other companies, fueling
surges in their share prices in a phenomenon known as a "short
squeeze."
    "Unfortunately, it's definitely not a one-off thing," said
Randy Frederick, vice president of trading and derivatives at
the Schwab Center for Financial Research. "The type of activity
that drove that higher, I believe, has caused people to try to
duplicate that in other names."
    J.P. Morgan earlier this week named 45 stocks that may be
susceptible to short squeezes and similar "fragility events,"
including real estate company Macerich Co  MAC.N , restaurant
chain Cheesecake Factory Inc  CAKE.O  and clothing subscription
service Stitch Fix Inc  SFIX.O .
    Like GameStop, American Airlines Group Inc  AAL.O , AMC
Entertainment Holdings Inc  AMC.N  and others that have recently
become targets of retail traders in recent days, all the stocks
have high short interest ratios.
    That means a large percentage of investors have borrowed the
stock to sell it in anticipation that they will be able to buy
it back at a lower price and profit on the trade. But if the
stock rises sharply, those investors may be forced to buy back
the stock at a loss.
    "The unfortunate events in GameStop this week may be
building a dangerous precedent for markets whereby retail
investors act en masse to leverage their buying powers to spark
fragility events," analysts at J.P. Morgan said in a note.
    Using derivatives and coordinating buying on websites such
as the Reddit forum wallstreetbets, retail investors have had an
outsize impact on markets in recent months. Hedge funds Melvin
Capital Management and Citron Capital closed out short positions
in GameStop earlier this week after buying pressure pushed up
the company's shares. 
    GameStop shares were recently down 25% on Thursday as retail
brokerages Robinhood Markets Inc and Interactive Brokers Inc
 IBKR.O , restricted purchases of the stock, along with several
others that have catapulted in recent days, including AMC
Entertainment Group Inc  AMC.N  and BlackBerry Ltd  BB.N .
 urn:newsml:reuters.com:*:nL4N2K33XI. Even so, the video game retailer's shares have
gained more than 500% since last Thursday.  urn:newsml:reuters.com:*:nL4N2K33F3
    Barring wider trading restrictions, similar patterns could
play out over several weeks as short sellers unwind their bets,
said Michael Purves, chief executive of Tallbacken Capital
Advisors. 
    Some firms run strategies that involve holding both long and
short positions on a stock, he said, and as a result, certain
stocks could see a surge and then a sharp drop as those firms
adjust their positions. That process could put pressure on
stocks more broadly and contribute to market volatility.
    "I do think the contagion risk is real," Purves said. "Any
stock that is heavily shorted is exposed to getting
GameStopped."

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GameStop, AMC stocks drop as Reddit trade runs into restrictions
    urn:newsml:reuters.com:*:nL4N2K33F3
EXPLAINER-Why regulators may scrutinize GameStop's Reddit-driven
retail stock surge     urn:newsml:reuters.com:*:nL4N2K246P
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 (Reporting by April Joyner and Saqib Iqbal Ahmed; editing by
Edward Tobin)
 ((April.Joyner@thomsonreuters.com; +1 332 219 1695; Reuters
Messaging: april.joyner.thomsonreuters.com@reuters.net; Twitter:
@aprjoy))