"...GameStop's Caa1 Corporate Family Rating reflects the risks related to its near term debt maturity of its $420 million senior unsecured notes due March 2021 and its weak interest coverage with EBIT/interest expense of less than 1.0. The rating also reflects length of time that the retail industry will continue to be highly disrupted and the resulting impact on the company's cash consumption. Its credit profile is also constrained by its vulnerability to product renewal cycles and new technology trends that pressure the traditional sales and business model, including new gaming console launches as well as downloadable, streaming, and subscription gaming services. The rating is constrained by ongoing pressure on revenue and margins, as the company's new video game software sales, hardware sales, and pre-owned business continue to be pressured, which will continue until the holiday 2020 season. As a retailer, GameStop is exposed to social risk such as changing demographic and societal trends, including the shift of consumers purchasing goods and accessories online. GameStop benefits from its low leverage level supported by debt reduction and its adequate liquidity profile supported by improved working capital management. The company's credit profile is further supported by its moderate scale and international reach, leading market position, and the flexible footprint of its store base..."
bron: https://www.moodys.com/research/Moodys- ... FRKQSZE021
Apr. 26, 2020
Short interest for the period ending April 15, 2020, was released on April 24th, after the bell. There were 58.84 million shares sold short.
This marks a remarkable increase, from 55.99 million, considering the April 20th proxy vote eligibility issue.
We learned that GameStop has $772 million of liquidity, as of April 4th.
I have been closely following (many that know me might even say obsessively so) financial markets since high school. I'm turning 40 this fall, so we are talking over twenty years of being a Stock Market Addict (I'm paraphrasing two book titles, Jim Cramer's Confessions of A Street Addict and Reminiscences of a Stock Operator by Edwin Lefevre). By the way, I read both books in my early twenties and liked them both.
Let me save you the suspense, today's article isn't a book review, rather it is a follow up to my popular recent article, It Only Takes A Spark For A Short Squeeze Inferno, published on April 12, 2020, here on SA.
The origins of today's title are from the recesses of my mind, when I recalled reading about an infamous letter from Indian IT services company founder, Byrraju Ramalinga Raju, and his former firm, Satyam Computer Services. For perspective, some equate this accounting scandal to the likes Enron, here in the U.S.
Raju famously described carrying out his elaborate fraud as:
Riding A Tiger, Not Knowing How To Get Off Without Being Eaten
I would argue that the GameStop (GME) shorts are presently atop that tiger, clinging on for dear life, with their mind in hyperdrive desperately trying to work out a MacGyveresque dismount.
On Friday, April 24th, after the bell, the short interest data was reported for the period ending April 15, 2020. Per the WSJ, 58.84 million shares of GameStop were sold short. To jog readers' memories, there were 55.99 million shares of GameStop sold short as of March 31, 2020 and 62.5 million shares sold short as of March 13th.
Besides the compelling valuation in concert with the widely anticipated catalyst, late November 2020 launch dates for the PlayStation 5 and Xbox Series X, I'm absolutely fascinated by this altitude sickness inducing short interest. I have an outsized interest in short squeezes, bordering on tornado chaser obsession, and I have never seen a setup this compelling. Although it is hard to argue the counterfactual, I would argue that Edwin Lefevre would be long shares of GameStop, given the unique setup. Remember, as of March 20, 2020, and per GameStop's 10-K, there were only 64,457,992 shares of GME in existence.
Yet if we look at the data now that is available, 58.84 million shares were sold short out of an entire share count of 64.46 million shares. In other words, 91.3% of all of GME's shares were sold short.
Now recall my last article, along with the excellent reporting by SA Contributor Justin Doepierala, who has carried the in-depth GameStop reporting baton, that unless moved by GME's management team, April 20, 2020 could be the record date for voting eligibility. If we look at the tale of the tape, and Michael Burry's disclosure on April 9th was probably the catalyst, GameStop trading volume crested to a year-to-date high water mark on April 14th. However, after that upwards of 66% rally ($6.47 per share as the intra-day high) from its April 9th closing price, to its April 14th intra-day high, shares of GME traded lower and on lower volume. The only real exception to the declining pattern, since April 14th, was a 15% rally on April 20th, as some shareholders might have made sure to be long shares so that they could vote in the highly contested proxy fight between Hestia/Permit Capital and GameStop's management over two coveted board seats.
So, if we unpack everything, I'm kind of shocked that short interest actually increased for the period ending April 15th, despite the upward share price momentum, and given the fact that Dimensional (7.1 million shares), Donald Foss (3.5 million), Michael Burry (3.4 million shares), and Must Asset Management (3.3 million shares) would have logically requested their shares be returned from securities lending programs. Please note, I did catch up with Justin, over the phone, and he politely noted that his fund is long roughly 500,000 shares, not the 350,000 shares I cited in my last piece (sorry for the oversight, Justin).
By the way, I'm already assuming that Permit/Hestia has recalled their shares from loan, simply because they wouldn't go to the trouble and expense of waging a proxy war and then somehow forget to call in their shares from loan, so as to be ineligible to vote. Therefore, we can safely assume that Permit/Hestia (long 4.668 million shares of its April 24, 2020 proxy filing) shares aren't out on loan. This then only leaves 59.912 million shares in existence that could be shorted. And lo and behold, as of April 15, 2020, 58.84 million out of 59.912 million (98.2%) were sold short.
So, if we put this all together, I can't for the life of me work out how and why, collectively, this group of hedge funds is riding this tiger. Moreover, I have no idea whatsoever, how they will dismount without getting eaten. I'm not even sure under the coaching of Isaac Van Amburgh that they could pull this off.
From a fundamental standpoint, GameStop provided an update on April 21, 2020.
Most importantly, they noted total liquidity of $772 million, as of April 4th.
"As of April 4, 2020, the Company had approximately $772 million in total cash and liquidity (approximately $706 million in cash and $66 million in availability on its revolver). The Company continues to expect it has sufficient liquidity and financial flexibility to navigate the current environment."
Recall that when GameStop published its 10-K, on March 27, 2020, they reported $769.7 million of liquidity.
"Our principal sources of liquidity are cash from operations, cash on hand and our revolving credit facility. As of February 1, 2020, we had total cash on hand of $499.4 million and an additional $270.3 million of available borrowing capacity under our $420 million revolving credit facility, which was undrawn as of February 1, 2020."
So despite Walmart (WMT), Target (TGT), and Amazon (AMZN) being able to be remain fully open, when the vast majority of speciality retail, and retail in general, are forced to be closed due to government COVID-19 mandates, GameStop isn't burning cash at the alarming rate hoped for by the hardcore shorts.
Also, on April 21, 2020, we learned that shelter in place mandates tend to drive more people to play video games. Was this really not intuitive?
As of April 15th, there were 58.84 million shares of GameStop sold short. Excluding Hestia/Permit's 4.668 million shares, as there is no way they would have forgotten to call back their shares from loan and be ineligible to vote, 98.2% of GameStop shares were sold short. Given the price action, from April 16th to April 20th, as well as relatively lower trading volume, considering the circumstances, how many shares were actually called back and are actually eligible to vote in the proxy?
I find it highly unlikely, if not impossible that Dimensional (7.1 million shares), Donald Foss (3.5 million), Michael Burry (3.4 million shares), and Must Asset Management (3.3 million shares), collectively controlling 17.3 million shares, as of the most recently available reporting data, didn't ask their prime brokers to have their shares recalled from loan.
Therefore, I'm shocked that as of April 15, 2020, the reported short interest wasn't in the mid to high 40 million share range.
Now the other nuance, and Justin pointed this out, is that GameStop's management can slightly move the goalposts by slightly delaying the annual meeting date and subsequent record date for voting eligibility. We will only know when GameStop's management officially announces it.
But even then, would Dimensional, Foss, Burry, and Must Asset play Russian roulette trying to guess that GameStop's management would extend the voting date and therefore didn't want to forgo earnings an extra week of annualized interest north of 100% to lend their shares?
Enclosed below, you can see that last week, the daily cost to borrow GameStop short hit a high water mark of 140%. It was 97.6% as of Friday's close, and only 10,000 shares could be located for borrow.
This coming Friday is May 1st. The shelter in play mandate will most likely be in place for May and maybe even for June. I live in Massachusetts and school has been canceled for rest of the year, and daycares are mandated closed until June 29th.
We saw that March 2020 was the best month for video games in twelve years and we learned from GameStop's April 21st update that sales are holding up nicely despite being limited to curbside pick up and only online sales channels. As of April 4, 2020, the company had $772 million of liquidity.
Given GameStop's strong liquidity, I would hope that they are buying every single 6.75% 3/15/2021 (cusip:36467WAB5) bond that anyone is willing to sell them at $0.80 on the dollar or less. If GameStop was able to retire $50 million (face value) of bonds at $0.80 on the dollar that would save $10 million as well as the 6.75% interest expense. That is very accretive to a company that only has a market capitalization of $308 million (as of April 24th).
When I synthesize the situation, I have no idea how the shorts will dismount from this tiger. There is a phrase in Bob Dylan's recently released masterpiece, Murder Most Foul:
"Greatest magic trick ever under the sun..."
The world awaits the greatest magic trick. As for me, I'm long and betting on that hungry tiger.
Comments: 1. According to S3 Partners' Ihor Dusaniwsky (often cited in WSJ, Bloomberg, etc.) even after the past two weeks short % of float remains a hair over 100% around 57M shares. There hasn't even been any squeeze yet and the stock closed above $6. Source: twitter.com/...
2. Did not see this, that's amazing... the stock was just over $7.50 pre-dividend cut. I've been assuming that this is the level where the majority of the short sellers are. The data seems to indicate that they never covered on the decline. With the higher fees and getting closer to the new consoles... do they really need to start seeing losses before they bail?
GameStop's position on the Threshold List continues. Maybe we'll get some data on the second half of April soon. I think there could be enough pain there to trigger the squeeze. I don't know what the price point of critical mass is, but $7.50 would have to be pretty close. If the fail to delivers get us over that point it may still trigger this thing.
An announcement from management that a sale leaseback has been agreed to (even if not finalized) and/or announcement of a debt refinance would likely do it at this point as well. As would a Treasury Loan.
3. Justin, I’m not sure re $7.50 being where shorts sweat, as since the dividend cut some shorts will have covered and some new shorts entered, so the average price that shorts got in may well be lower than $7.50.
Also given the market as a whole is down over 15% presumably those that have a tendency to short may well have made good gains elsewhere to offset any loses they may have with GME.
I suspect most shorts still see GME going bankrupt but you are right the recent share price increase and high borrowing costs must be making some wonder about staying short in GME
4. Yeah, the short situation is somewhat bizarre relative to tlrd and bbby, two other specialty retail stocks I've been somewhat following. The short percents for those two were in the 60%s or maybe even 70%s a few months ago, but shortsqueeze.com has it now at around 50% each. The stock price for those two have dropped by more than 50% each in the past couple of months so the short percent drop was probably due to profit taking and knowing that a bottom is basically in and getting out for short sellers.
GME other the other hand appears to be the complete opposite. The stock price has gone up 100% from its recent lows yet the short percent is still around 100%. It's almost as if shorts saw the stock price going up and that indicated to them that it would be a good time to go short on it. This stock seems like a huge anomaly of a special situation. I'm almost tempted to go all in on gamestop, which I haven't yet. Even Take out new 0% apr credit cards and draw out loans from them and put that into gamestop. convince my parents to take out all their money from their 401ks S&P index funds and put it all into gamestop. Draw out all my margin in my brokerage account and use it to buy gamestop. Sell my furniture on craigslist and take that money to the bank and then buy gamestop stock and options with it. Obviously I won't actually be doing any of that, but I'm joking about just how utterly ridiculously bullish I feel for this stock at this moment and conditioned on all this new evidence my belief that this stock will surge has hit all time highs, especially with a catalyst the size of the sun, the upcoming console cycle, coming right up.
Thanks for reading my ted talk. Let's see what happens on Monday.
5. wow, seems like GME is the once in a life time opportunity to you.
The recent first rally likely because of Dr Michael J Burry; the recent second rally likely because of the H/P letter filed with SEC; both have good reason to explain. but the spike in intraday trading last Friday, out of nothing, seems to me like the first big short to cover. Hope it is the first blood and a bloodshed coming next week.
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bron:https://seekingalpha.com/article/434008 ... ent=link-2
bron: https://www.nytimes.com/interactive/202 ... virus.html
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