industry insider | Jan 28, 2021 |
How Bed Bath & Beyond got caught up in the GameStop madness

Casual observers of the stock market might have noticed some bizarre activity coming from Bed Bath & Beyond recently. Last week, shares of the home goods retailer were trading around $25. Then, on Monday, the stock began a crazy bull run, shooting up to $52.89. Did the company just make a major acquisition or sign a rock star executive? Is Elon Musk planning to open a Bed Bath & Beyond on Mars?

None of the above. The real answer is even weirder. But first, if you haven’t been following the news about this week’s broader stock market volatility, a quick primer.

On Wall Street, it’s a relatively common play for investors to “short” the stock of a troubled company—essentially placing a bet that the price will go down. (The mechanics of this are slightly complicated, but in essence an investor borrows shares of a stock and immediately sells them at the current market price. If the stock goes down, the investor repurchases the shares at the new price and then returns them to the original owner, pocketing the difference.)

Short sales are mildly controversial. For one, you’re betting on failure. For another, big short positions have a way of becoming self-fulfilling prophecies: Investors bet a company will fail; others take notice and sell their shares; and soon the stock price goes down and the company really does fail, through no fault of its own.

Still, short selling is common, and every day there are billions of dollars wrapped up in the practice. Unsurprisingly, many hedge funds have lately staked out large short positions on retailers teetering on the verge of obsolescence. Companies like the mall video game chain GameStop. Which is where the story gets truly weird.

On the massive message board site Reddit, there’s a community of users who post on a board called Wall Street Bets. Populated by amateur day traders and gonzo retail investors, the board is generally filled with hyped-up stock tips and Wolf of Wall Street memes. But recently, the group started to coalesce around an idea: Buy up shares of GameStop en masse, sending the stock’s price through the roof.

The risk of short selling is that if the bet is wrong—if the price goes up instead of down—the investor’s potential loss is infinite. To hedge against a devastating loss, a short seller will often start buying shares of the stock as it climbs. This, ironically, can become a self-defeating maneuver. Other investors see a stock going up, so they join in buying shares, driving up the price even more. Pretty soon, the short seller is broke.

That’s precisely what happened with GameStop. A week ago, the stock traded at $41 a share. Spurred by the traders at Wall Street Bets (alongside larger investors who saw what was going on), share prices shot through the moon. This morning, GameStop peaked at $469 a share, though it has since dropped down to around $230. Several hedge funds, most famously Melvin Capital, have lost billions on their bets against the video game chain. On the flip side, retail investors who bought into GameStop early are now sitting on a small fortune—at least for the time being.

Artificially pumping the price of a stock to burn short sellers (the move is called a “short squeeze”) is not a new phenomenon. However, this is the first time the maneuver has been pulled off by a group of retail investors loosely organized over social media. And once it worked on GameStop, attention turned to other widely shorted stocks—like Finnish telecommunications giant Nokia, the movie theater chain AMC, mobile device maker BlackBerry, and, you guessed it, Bed Bath & Beyond. (All of the companies targeted in these short squeezes have been widely recognizable consumer brands—companies that the average retail investor would be familiar with.)

As a result, Bed Bath & Beyond’s stock is currently swinging up and down wildly. It peaked at $52 yesterday, but dropped to $33 this afternoon. Other stocks caught up in the short squeeze mania have been seesawing as well. The SEC is monitoring the situation, and President Joe Biden has apparently been briefed. In an effort to calm the volatility, popular online brokerages like Robinhood and TD Ameritrade have frozen trades on the Wall Street Bets stocks.

Where this all lands is difficult to predict. The Reddit-instigated short squeezes have become something of a cause celebre on social media and beyond. There’s a certain kind of romance to the story of a mass of everyday investors banding together and beating Wall Street veterans at their own game. The phenomenon is a strange new hybrid of viral meme, income inequality protest, and get-rich-quick scheme.

Of course, when the squeeze ends, the stock price starts to fall, and many who bought GameStop on the way up will lose money. It’s also worth noting that all of the companies caught up in this frenzy are real companies, employing real people. When the squeeze ends, it’s possible that Bed Bath & Beyond’s stock will gently land at a “normal” price, and business will continue as usual. It’s also possible that it will keep falling (several analysts have already downgraded their recommendation on the company’s stock) and Bed Bath & Beyond will suffer the consequences.

As last week has shown us, anything is possible.

Homepage image: © Simone | Adobe Stock

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