Exploit the Market’s Irrationality with GameStop Stock

Video-game retailer GameStop (NYSE:GME) isn’t a particularly thriving business. Yet, traders love to buy and sell GME stock and the mainstream financial media can’t stop talking about it. This leaves many investors wondering whether it’s a good idea to take a position.

GameStop video game and electronics store logo sign in Bay Terrace, Queens, NY.Source: quietbits / Shutterstock.com

Not long ago, I advised Robinhood and Reddit users to take stock trading more seriously. I’m certainly not abandoning that line of thought, as “meme stocks” can damage your account irrevocably if you treat trading like a video game.

At the same time, I like to consider opinions that oppose mine. Could there be a compelling reason to buy GME stock even if the company isn’t doing well?

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Perhaps there is, and I’ll explore that possibility today. Just please don’t take a large position in the stock as the GameStop saga is still unfolding; no one knows how this story is going to end.

Tracking the Moves of GME Stock

The first thing to mention is that GameStop’s trailing-12-month earnings per share is -$4.22. That’s not a good sign, admittedly.

I suppose that’s not deeply negative for a stock that’s over $100. On the other hand, some folks would contend that GME stock shouldn’t be over $100 in the first place.

As recently as August 2020, the stock was trading at $4 and change. It qualified as a penny stock, defined by the U.S. Securities and Exchange Commission as a stock trading for less than $5.

This makes the early-2021 run to $483 all the more incredible – and the subsequent plunge to $40 all the more understandable.

In early March, GME stock was already back up to around $140. Yet, the price action seems to be stabilizing. This time around, the climb is steadier, more orderly. As of today, the price of GME stock is hovering around $182.

A Better Angle

The price action is actually starting to remind me of Bitcoin (CCC:BTC-USD). Remember how the Bitcoin price went up too far too fast in late 2017?

That first bull run was mainly fueled by hype and speculation. The mainstream adoption of cryptocurrency wasn’t established yet. Bitcoin’s price move was too steep; the angle was too close to vertical.

The same thing could be said about GME stock. At the beginning of February, I could envision the stock completing the dreaded Eiffel Tower pattern: straight up, then straight down.

That’s why I issued a warning to avoid taking a large position in the stock at that time. The rise and fall of the first Bitcoin pop-and-drop phase was playing out all over again, but this time with GameStop shares.

Now, Bitcoin is pushing higher on a slower and perhaps more sustainable trajectory. The same thing could be said GME stock. The angle of ascent is steep, but at least it’s not almost vertical.

Betting on Greater Fools

Another argument in favor of owning GameStop shares today is that the greater fool theory will still hold up.

In essence, this theory holds that you can justifiably own an asset that would be foolish to own based on fundamental principles, since you’ll probably be able to sell that asset to a greater fool who will buy it at a higher price.

The worst-case scenario would be owning the asset at its highest price, with no fools left who are willing to buy it. That’s what took place when the GME stock topped out at $483.

As long as the market is irrational, there’s always the possibility that GameStop shares will go up.

If you don’t believe this, consider how the stock price rocketed upwards after GameStop board member Ryan Cohen tweeted a picture of an ice cream cone, and then shot up again after Cohen posted what appeared to be a screenshot from a Pets.com television ad.

GME Stock: The Bottom Line

If you don’t believe that GME stock could reach $483 again in 2021, then I envy you for your lack of cynicism.

Maybe I’ve become jaded by years of participation in seemingly senseless financial markets. All I’m saying is that another moon shot in GameStop shares is possible – and with so many fools out there, it might even be probable.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.

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