Advisors: Gamestop Stocks A Risky Bet

Jan. 30—PLATTSBURGH — Investment professionals here have different takes on what's being called Wall Street's David-and-Goliath story.

While Financial Advisor Robert Donlan recommends investors steer clear of GameStop and other stocks like it, economics professor Dr. Razvan "Raz" Pascalau says, "If you see an opportunity like this, you should take advantage of it."

SHORTING STOCKS

GameStop has made headlines all week.

Believing the video game retailer, which was on a downward financial trajectory and had announced future store closures, would continue its slip, wealthy investors decided to "short" the company's stock.

In doing so, investors borrowed shares and sold them with intentions to repurchase them once the price had dropped in order to make a profit.

"Basically, you're hoping it goes down," Donlan, of Donlan and Barcomb Investment Services, explained.

In the end, more than 130 percent of the stock's shares were sold.

'REDDIT REBELLION'

But what if the stock's price went up, instead of down? That's the question Reddit users had considered.

A group of the web service's users had tuned into the "r/wallstreetbets" Reddit forum and, noticing the GameStop shares were heavily shorted, had rallied together to buy them, causing stock prices to rise and forcing what's called a "short squeeze."

"It was a concentrated effort by the Reddit users to drive up the stock," Pascalau, a SUNY Plattsburgh business and economics professor, said. "It basically forced the short seller to also buy the stock."

Instead of buying the stock back at the lower price, those big investors, who bet it would go down, were forced to buy it back higher.

When they did, the stock's worth shot up again.

"At some point you have to cover your shorts. . . and they have to buy it back, because they're losing so much money," Donlan said. "That's the short squeeze; that's what makes the stock run even more."

The GameStop stock price started 2021 at around $20. By 10 a.m. Thursday morning, it had jumped to nearly $500 per share.

Though it dipped throughout the day, it ended just under $200.

'PURE, UNADULTERATED GAMBLING'

Donlan described the situation as a "coordinated attack" against hedge funds and believed, when all was said and done, it was "probably going to end poorly for the 'little guy.'"

"We're worried the little guys are going to get hammered," he said.

The financial advisor said some locals who use Reddit and stock trading apps like Robinhood had called to see what all of the fuss was about.

"Somebody came in at the last minute," he said, adding that the individual had tuned into the Reddit forum and thought, "Oh this is going to be great. I'll put my $10,000 in savings in."

But, with the market's fluctuation on Thursday, Donlan said he highly recommended people not get involved with the GameStop stock or any other shorted stocks like it.

He noted GameStop's grim outlooks and said, if someone took a look at their balance sheets, they'd say, "Never in a million years would I buy this thing."

"This is not investing," he said. "This is pure and unadulterated gambling."

MARKET MANIPULATION

Earlier Thursday, Robinhood and other broker applications froze trading on some over-shorted stocks like GameStop, including those of AMC Entertainment, American Airlines and Nokia.

Amid the GameStop hubbub, smaller investors had taken interest in those other stocks, including Pascalau, who said he tries to stay up to date and take advantage of the market when he can.

Robinhood's decision allowed users to sell their shares, but not buy more, was not well received by its following or many political leaders.

"I think it's market manipulation," Pascalau said, adding that the decision left him feeling highly suspicious.

'SMART THING TO DO'

The SUNY professor thought the GameStop fiasco was gaining so much traction, because "it's the first time that social media has allowed small traders to act in unison."

While hedge funds had gone head-to-head, it had received much less news coverage, he noted.

"No one actually cared too much, because 'they're professionals' and 'they know what they're doing," Pascalau said. "Somehow here, because you have the 'small guys,' people are saying 'they're inexperienced or 'they don't know what they're doing' or 'let's protect them from themselves.'"

After saying investors should know their risk tolerance, it was his belief that noticing and taking advantage of a stock prone to a short squeeze was "a smart thing to do."

"Some of those small trades are going to lose money, but at the same time some people are going to get super rich."

REGULATIONS

Pascalau felt the situation was bound to be regulated. If so, he thought it should be on shorting the market.

"When you're allowed to short 140 percent of the float of a stock of a company — that's where the regulations need to come in," he said. "I don't think the little guy is at fault here.

"If the hedge funds are allowed to get rich, who's to say that the small guys are not allowed to put in some speculative bets and also get rich?"

Email McKenzie Delisle:

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Twitter: @McKenzieDelisle

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