The glut in short interest that allowed an army of Reddit traders to squeeze a number of hedge funds out of billions of dollars has largely subsided, Goldman Sachs said Wednesday, turning a page on the saga that briefly rattled the raging bull market.
As a percentage of shares available to trade, GameStop’s short interest, or the number of shares sold short and pending closure, has plunged from a high of 140% in January, when the firm was the most-shorted stock on Wall Street, to roughly 45%, Goldman Sachs said in a note to clients Wednesday.
GameStop’s short interest plunge since January 15 has been the largest among companies in the Russell 3000–making the brick-and-mortar gameseller the third-most heavily shorted stock in the index, behind non-meme stocks Academy Sports and Outdoors and Gogo Inc.
“The implications of recent violent share price swings are both significant and inconsequential,” the Goldman analysts led by David J. Kostin said in a separate note Friday, adding that short interest levels have only exceeded 100% of a company’s float 15 times in 10 years.
“Experience suggests firm makeovers typically take time,” the analysts added, referencing the activist investor that retail traders expect will help GameStop mint a turnaround and dismissing the recent valuations as “absurd.”
Shares of GameStop, which were up 2% Wednesday, have plunged about 85% since a closing high of $347 on January 27, pushing down the firm’s market capitalization by about $20.5 billion.
The short interest in other meme stocks, including Bed Bath & Beyond, National Beverage Corp and AMC Networks, has also tanked since the Reddit-fueled mayhem, with those firms now down about 45%, 33% and 20%–respectively–from their late-January highs.
The plunging prices of so-called meme stocks like GameStop, AMC and Bed Bath & Beyond have given fodder to Wall Street experts who’ve noted for weeks that their sky-high valuations would get a dose of reality in due time. “A flurry of odd-lot cash orders and call options supercharged the stock price and forced short-covering at higher and higher share prices,” Goldman said Friday, adding that prices only plunged further after brokerages like Robinhood suspended meme-stock trading to meet capital requirements from the Depository Trust & Clearing Corp. Hedge fund losses neared $20 billion in January before the declining short interest helped temper retail-trader demand.
“The GameStop saga caused real concerns about what it meant for the markets as a whole—and fears that it could disrupt the recovery,” Brad McMillan, the chief investment officer of $200 billion RIA Commonwealth Financial, said Wednesday. “Yet, as we enter February, the hedge funds are largely still there, GameStop shares are down quite a bit, and the market is up. Increasingly, the market risks we know—and those that surprised us—are looking less threatening, and the market is responding.”
Though the broader market took a big hit during the heightened uncertainty, stocks are once again at record highs Wednesday.
What To Watch For
On February 18, the House Financial Services Committee will hold a hearing to discuss the recent market volatility. Goldman says topics likely to be explored will include the gamification of retail investing, the capitalization of broker-dealers and the mechanics of short-covering.
“Equity markets got off to a fast start in 2021 as greed continued to overcome fear, Morgan Stanley analysts said in a note to clients Monday, referencing the retail trading frenzy fueled largely by aggressive margin debt. “When such periods occur, it’s rarely been easy or wise to get in the way; instead, these trends typically need to run their course until they are derailed or simply exhausted.”