The battle between GameStop (GME) – Get your GameStop Corp. report. Class A Bulls (or rather, “monkeys” as they are known) and bears are far from over. More recently, GameStop and other stock companies handed it over to those who bet against them.
Here, we’ll take a look at a capital management company that holds short positions on GameStop. They recently outlined their “long-term” fund investing thesis and their expected next steps after a disappointing quarter.
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Inside the short seller mentality
The Amalthea Fund, set up by Australia-based capital management firm Bronte Capital, has a “long and short” strategy. On the short side of things, they’ve taken positions betting on nearly every major meme stock, including both GameStop and AMC.
Recently, the fund released its first-quarter performance results to investors. Although the fund’s performance was not as bad as global markets in general – it fell by 5.97%, while the MSCI All Country World Index (ACWI) – Get the iShares MSCI ACWI ETF Report It fell 12% – fund managers said they were unhappy with the quarter’s results.
One of the main reasons behind Amalthea’s lackluster performance was a rally in stocks in March. Fund specifically referred to its bearish stance on GameStop when discussing this rise.
Bronte Capital thinks GameStop’s assessment is absurd, even when one factor in the company’s modest success in reinventing itself. Fund managers commented that GME’s recent financial results were horrific and that the company’s doubling of market capitalization in March was “ridiculous.”
However, the company also admits that it recognizes that GameStop’s “ridiculous” rating could double repeatedly In the near future.
“[GameStop’s] The reviews are ridiculous but if you double the price it won’t be ridiculous twice. They are similarly detached from reality.”
Bronte Capital’s thesis on GameStop includes momentum as well as fundamentals. Fund managers believe the “retail frenzy” is waning and that recent volatility is still pale compared to the pressure of January last year.
Hard times waiting for short sellers?
Bronte Capital has identified some potential catalysts to approach GameStop, and possibly other meme stocks as well.
GameStop has announced a stock split proposal, which will be voted on in early June. Although, in theory, a stock split does not add any value to the company’s fundamentals, according to Bronte Capital, “not accepting a value-added stock split is a recipe for losing money.”
The importance of stock splits is most evident in the options market, where a standard buy or sell contract leverages 100 shares of the underlying asset. Thus, options tend to be more expensive when the underlying shares themselves are more expensive.
To give an example, a short-term, low-money (OTM) GME call option contract – $129 strike price, expiring May 6 – currently costs $800. If GameStop offers a 3-for-1 split, similar OTM calls may sell in the near term for just $266. A drop in the GME stock price would make GME’s underlying options more accessible to the masses (ie, retail traders).
Thus Bronte Capital warned of the potential impact of a stock split on the GME options market. Originally, they themselves were skeptical. They believed that options trading was largely driven by professionals who had a lot of capital at their disposal, not “retail strangers”. However, the stock company has come to the realization that retail traders can be the primary drivers of option prices, which in turn can affect the performance of stocks – especially meme stocks.
This threat of options-driven volatility puts Bronte Capital in a “position where it does not feel comfortable enough”.
There is still a severe shortage of GME, stress may be imminent
To sum up, and repeat what we’ve said in several of our articles at GME over the past few months, short sellers are still playing with fire. And they know it. GameStop’s short interest is currently 21% of its float, with approximately 14.13 million shares sold. This number is higher compared to the previous month when 12.35 million shares were short sold.
The short, high interest can of course be related to the company’s weak fundamentals. But, the short interest of more than 15%, which is considered too high, can put pressure on the stock. Especially if there is significant buying pressure caused by some short-term catalyst – such as, for example, a stock split.
(Disclaimer: This is not investment advice. The author may be affiliated with one or more of the stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not affect editorial content. Thanks for supporting Wall Street memes)