Veteran money manager Bill Smead has seen just about everything in his 40-year career on Wall Street.
But even he concedes that the shocking speculative mania underway in heavily shorted shares of fundamentally challenged companies such as GameStop (GME), Express (EXPR) and BlackBerry (BB) is unlike something he has ever seen before.
“I have seen a lot in 40 years in the business, but some of the things we are seeing lately would have been considered wild in the year 2000,” the long-time value investor said on Yahoo Finance Live, referencing the tech stock boom and then bust.
Smead, who is chief investment officer of Smead Capital Management, warns traders riding the momentum (as my colleague Myles Udland reports, the trading activity is being fueled by speculative commentary in Reddit chat rooms) they are likely to wind up defeated once the fervent buying settles down and rationale heads prevail.
“The SEC is going to step in and stop people from gathering in basically a chat room like the AOL chat rooms in 1999, and doing a bull raid on a stock. The short sellers have gotten incredibly crushed in all of these even before they ganged up on the stocks. Now they are ganging up on them. Who is left to buy when the buyer at the margin is something that’s just trying to torture a short seller? This is incredibly unhealthy. There will be hell to pay for what you are seeing on your screen right now,” Smead says.
Thus far, the short sellers driving the buying mania are thinking about anything but it all ending badly (as it inevitably will).
GameStop shares — which set the mania into gear earlier this month — continue to lead the speculative charge. The stock surged 50% by Monday afternoon, pushing its year-to-date gain to a bewildering 426%. Shares are at a record high despite the company seeing five new CEOs since 2017, material sales and profit margin erosion this past decade and no expectations of profits for at least another year.
But the traders have piled into the name this month amid a boardroom shakeup and the arrival of Chewy founder Ryan Cohen as a 13% shareholder in the company. The developments have been interpreted by traders as transformational for GameStop, and they have jumped into the heavily shorted stock hand over fist. Momentum has beget momentum in the market for GameStop shares. Where it stops is unclear.
Now the crowd of short sellers have set their sights on similar stories.
Express — a dying mall-based apparel retailer —saw its stock surge more than 100% totally out of the blue at one point today. Similar to GameStop, the gang of short sellers appears to be taking their cue from favorable news earlier this month. Express secured $140 million in additional funding to help it ride out the COVID-19 pandemic.
However, Express and GameStop remain markedly weak companies from a fundamental perspective. Neither company warrants to be worth 50% or more versus last Friday’s close, especially as there has been no fresh news in weeks.
The same could be said for BlackBerry, the newest well-shorted stock to be tossed into the speculative buying mania. Shares rose 31% in Monday’s session, on no new news. The gas for BlackBerry’s sizzling rise looks to be it selling 90 patents to Huawei, but that happened several weeks ago.
While BlackBerry arguably has the best business model among GameStop and Express amid a push into auto technology for infotainment systems, it’s hard to justify the company being worth 30% more versus Friday’s close.
Warns Smead, “The abuse for this stuff is going to cause a whole generation of people to not want to participate in the stock, which is exactly what happens every 30 years. We have to go through this.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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