If you have invested in a video game retailer GameStop (NYSE:GME) hoping for an epic 2021-style short squeeze, don’t get your hopes up. It is unlikely to happen in the near future. Additionally, if you’re holding GME stock because you want GameStop’s CEO to lead a turnaround for the company, you should probably temper your expectations.
Sure, the meme stock mob has given GameStop’s market cap and stock price a boost in 2021. This year, however, the short squeeze crowd seems to have lost its momentum.
Now GameStop investors own shares in an unprofitable company. Perhaps bulls are pinning their hopes on a miraculous recovery after GME stock’s sharp decline since June. However, most likely the best strategy is to move on to more promising opportunities.
Will a Ban on Naked Short Selling Save GME Stock?
I won’t particularly challenge anyone as I’m not here to embarrass others. However, I have seen amateur stock traders on social media spreading unfounded rumors. That’s why I feel the need to address this issue now.
Let’s talk for a moment about the practice of “naked” (i.e. uncovered) short selling. This typically involves short selling a stock without borrowing the shorted stock from a broker in a timely manner or at least arranging to borrow it. In some cases, the stocks sold short don’t even exist.
Don’t listen to rumors that the Securities and Exchange Commission (SEC) will ban naked short selling in 2023 or 2024. The practice of naked short selling is already illegal in the United States
However, this illegal practice apparently still occurs, as Harry Turner, founder of The Sovereign Investor, explains:
“The most infamous recent example of naked short selling was the GameStop saga in 2021, in which traders reportedly shorted around 140% of their shares… This meant that 40% more shares were sold short than existed, which can only be described as ‘Phantom’ is possible. Sales from naked short sales.”
Perhaps the false rumors arose because the SEC is implementing new regulations to improve transparency in legal (non-naked) short selling. However, none of this suggests an imminent, epic short squeeze in GME stock.
GameStop’s CEO’s leadership skills are being questioned
Let’s get to the topic of leadership: Ryan Cohen replaced Matthew Furlong as CEO of GameStop not long ago. Cohen founded Tough (NYSE:CHWY), a pet products e-commerce company that doesn’t bear much resemblance to GameStop.
Apparently Cohen is looking to cut costs. He reportedly sent an email to some GameStop employees in which he stated, “Utmost frugality is required” and, “Every expense of the company must be scrutinized and all waste eliminated.”
One can only imagine the negative impact “extreme frugality” could have on GameStop’s quality of customer service. Furthermore, Cohen’s draconian stance will almost certainly affect the morale of the company’s employees.
My comment may sound harsh, but it is mild compared to what Wedbush analysts Michael Pachter and Nick McKay had to say about Cohen. InvestorPlace contributor Chris MacDonald recently mentioned that Cohen is the largest individual shareholder in GameStop RC Ventures and holds around 12.1% of the company shares.
From this, Pachter and McKay draw a damning conclusion about Cohen’s worthiness to lead GameStop. “The appointment of the majority shareholder reflects the difficulty GameStop has had in attracting competent executives,” Wedbush analysts warned.
In addition, Cohen was elected CEO of GameStop by the company’s board of directors. This panel (according to Seeking Alpha) consisted mostly of Cohen’s colleagues at Chewy. This suggests, Pachter and McKay claim, that Cohen’s “appointment was more of a coronation by his faithful.”
These are notable points that hardcore GameStop fans should consider. You can also heed the cautionary note from Wedbush analysts about Cohen and ultimately GME stock. “With no experienced retail executives to advise him, we suspect GameStop will continue its march into obscurity,” Pachter and McKay ominously predicted.
GME stock could actually be headed to zero
In the article cited previously, MacDonald suggested that GME stock was headed to zero. In my opinion this is actually possible. Additionally, banning naked short selling is unlikely to help GameStop investors recoup their losses.
Additionally, Wedbush analysts’ objections should be duly noted. They emphasized: “Cohen has no significant experience running a physical retailer.” The point is that Cohen may not be the right choice for the CEO position at GameStop. Therefore, it is advisable for investors to stay away from GME stock as its trajectory towards zero is relentless and likely unstoppable.
At the time of publication, David Moadel did not hold, directly or indirectly, any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s publication policies.
David Moadel has provided compelling content—and occasionally pushed boundaries—on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.