Analysis-Shorts circle GameStop and AMC, sensing retail fatigue

[June 07, 2022]  By David Randall and John McCrank

NEW YORK (Reuters) - Bearish investors are ramping up bets against meme stocks GameStop Corp and AMC Entertainment Holdings Inc, spotlighting how short sellers have grown bolder during a broader market selloff that has pummeled risky post-pandemic favorites once beloved by retail traders.

Overall short interest as a percentage of the company's float stood at 24% for GameStop and 22% for AMC, near their highest levels in a year, according to data from S3 Partners.

"Retail investors are at a point now where they are just sitting on the sidelines and they’ve lost money in many cases," said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

At the same time, "institutional investors don’t have the luxury of sitting on sidelines and they are much more comfortable going short so they are becoming the more dominant player in the market," he said.

The meme stock craze erupted in early 2021, when an army of individual investors piled in to shares of GameStop, AMC and other once-unfashionable companies, contributing to eye-popping rallies in their shares and forcing hedge funds to unwind their bearish bets against them - sometimes after sustaining considerable losses.

More recently, retail traders' speculative fervor appears to have cooled amid a broader market selloff fueled by worries over a hawkish Federal Reserve. The S&P 500 is down 13.5% year-to-date after approaching the cusp of a bear market last month, while GameStop and AMC are down 13.7% and 56%, respectively.

Retail investors have been net sellers of single stocks for the last eight weeks, said Peng Cheng, head of big data and AI strategies at JPMorgan.

Flows tracked by Goldman Sachs, meanwhile, showed that retail investors had sold most of their U.S. equity purchases from the last two years, analysts at the bank said in a note last week.

“Most of these bubbles start to slowly revert to fundamentals as professional investors regained confidence and bet against them,” said Giacomo Pierantoni, head of data at Vanda Research, which tracks retail buying.

Of course, GameStop and AMC shares have been known to mount unexpected rallies that have badly hurt short sellers, making betting against them a white-knuckled affair.

GameStop logo is seen in front of displayed Reddit logo in this illustration taken on Febr. 2, 2021. REUTERS/Dado Ruvic/Illustration//File Photo

GameStop shares, for instance, more than doubled in price earlier this year, though they have since pared those gains. Retail investors still appear willing to step in during sharp market declines in an effort to buy shares on the cheap and poured a net $2.8 billion into the market in the week that ended June 1, JPMorgan data showed.

That should give hedge fund managers pause before shorting meme stocks aggressively, said Charles Lemonides, head of hedge fund ValueWorks LLC.

"There's been too much confidence among the shorts that these businesses are completely failed," he said.

Shares of GameStop are down 63% from the record closing high of $347.51 they reached in January 2021. The company beat revenue estimates and reported a loss of $2.08 per share when it reported quarterly results on June 1.

AMC's shares, meanwhile, are down nearly 81% from the record $62.55 level where they closed in June 2021. The company also beat revenue and earnings expectations when it delivered quarterly results in May, though it remains unprofitable.

Rising short interest in AMC is occurring at a time when the company’s fundamentals are improving, said Alicia Reese, an analyst at Wedbush Securities Inc.

After less than two weeks on screen, "Top Gun: Maverick" has pulled in $291 million in North America, leading some box office analysts to predict that it could generate more than $1 billion in ticket sales and help bring consumers back into theaters.

Still, AMC trades at about three times her firm's price target of $4, Reese said.

"As an industry play, it doesn’t seem like it's a great time to short," she said. Instead, bets against the company "reflect that institutional investors think that the retail shareholders are experiencing fatigue here."

(Reporting by David Randall and John McCrank in New York; Editing by Ira Iosebashvili and Matthew Lewis)

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