GameStop stock market surge captures attention, enriches Michigan billionaire Donald Foss
The dizzying, unlikely ascent of shares in brick-and-mortar video game retailer GameStop Corp. this week has set Wall Street and social media abuzz — and made one Michigan billionaire considerably wealthier.
GameStop's share price was $347.51 at close of market Wednesday, a one-day gain of nearly 135% and more than 80 times higher than where the stock closed a year ago.
The stock's recent movement has pitted day traders and users of the social media site Reddit against Wall Street short sellers betting on GameStop's fall. It's a drama that has captured the attention of industry observers, prompted warnings of a bubble, and garnered scrutiny from the White House.
Meanwhile, the equity markets sank Wednesday on news that the Federal Reserve would leave interest rates unchanged, some disappointing earnings reports and renewed fears of coronavirus spread. The S&P 500 posted its worst session in three months, dropping 2.57%, and the bellwether Dow Jones Industrial Average sank nearly 634 points, or 2.05%, to close at 30,303.
Closer to home, GameStop's movement has driven significantly higher the net worth of Donald Foss, the now-retired founder of Southfield-based subprime auto lender Credit Acceptance Corp.
Foss took a 5.3% stake in GameStop in February 2020, according to federal regulatory filings, and has been one of the biggest beneficiaries of the stock's climb. He purchased more than 3.5 million shares in the company for about $12.5 million, when the stock was trading at under $4 per share.
As of Wednesday's close, 3.5 million shares would be worth more than $1.2 billion. Forbes pegs Foss's net worth at $2.5 billion, an increase of more than $670 million since close of trading Tuesday.
Foss started Credit Acceptance in 1972. He's known as one of the first to extend financing — often at steep interest rates — to customers with poor or no credit, a market that exploded in the wake of the Great Recession. According to Forbes, Foss ran the company as CEO for three decades, took it public in 1992, then stepped down as director and retired in 2017.
In an emailed statement, David Kudla, founder, CEO, and chief investment strategist of Grand Blanc-based Mainstay Capital Management, LLC called the GameStop saga "fascinating."
"Confident retail traders from Reddit's WSB (WallStreetBets) subreddit have taken advantage of a perfect short squeeze opportunity to push back on traditional financial institutions," he said, explaining that on Reddit a "subreddit" is a community or collection of content focused on a specific topic.
"To be clear," Kudla added, "little has changed in terms of GameStop's fundamentals, but the strength of the retail investor has been amplified by recent fiscal stimulus measures, an accommodative Fed backdrop, and massive institutional short positions."
Wall Street analysts have pointed out that GameStop's ascent is largely divorced from the reality of its business fundamentals. The Texas-based company in December reported that its third-quarter net sales in 2020 were down more than 30%.
But, the Washington Post reported, the company's stock began to gain some momentum earlier this month after Ryan Cohen, co-founder of online pet supply company Chewy, as well as two other former Chewy executives, joined GameStop's board of directors in a bid to speed its shift to an e-commerce-oriented business. The company maintains a massive retail footprint, with thousands of locations across the country.
Kudla noted, too, that the same is now happening with other "heavily shorted" companies such as movie theater chain AMC Entertainment Holdings Inc., which was up more than 300% at close of market Wednesday. Another example: clothing retailer Express Inc., which closed the day at $9.55 per share, up from just over $3 per share at Tuesday's close.
"These retail traders are much savvier than many give them credit for," said Kudla. "That said, rallies in the market and specific individual stocks have been disconnected from fundamentals for some time now due to the aforementioned Fed actions. The future of many of these companies is still up in the air, but this new market dynamic has been interesting to say the least."
GameStop's upward trajectory has not been a straightforward climb. Its shares rose 157% to a session-high of $380 shortly after 11 a.m. Wednesday in New York, leading to at least two volatility halts.
The meteoric rally has left short sellers counting the cost in a battle with day traders who have taken to the Reddit social media platform to encourage others to follow their lead. Melvin Capital closed out its short position, while Citron Capital’s Andrew Left said the firm covered the majority of its short in “the $90’s at a loss of 100%.”
“It does feel like rationality and fundamentals are just kind of dead,” J Capital Research co-founder Anne Stevenson-Yang told Bloomberg. “If you’re short you’re in a very difficult position because you have to buy the stock to get out, so you end with a heavily overvalued stock.”
GameStop didn’t respond to requests for comment.
The stock’s gains were fanned late Tuesday after Tesla Inc. chief Elon Musk tweeted a link to a Reddit thread about the company. But famed fund manager Michael Burry warned that the manic rally has gotten out of hand, calling the stock’s rise “unnatural, insane, and dangerous.”
Venture capitalist Chamath Palihapitiya, who pushed the gains higher yesterday after tweeting about buying calls, said on CNBC that he closed his GameStop position.
“It really just goes to show the classic saying that markets can stay irrational longer than you can stay solvent,” said Greg Taylor, chief investment officer at Purpose Investments, according to Bloomberg. “So you can try to fight this as long as you want but at some point you just have to give in and just step to the sidelines. That feels like the phase of the market we’re in right now, where things are going a little crazy and definitely divorced from fundamentals.”
Another note of caution was provided Wednesday by Bank of America Corp. analysts. While raising their price target to $10 from $1.60 to reflect the stock’s recent surge, they noted that GameStop is in “a weaker not a stronger place” and reiterated their underperform recommendation.
“While it is difficult to know how much very high short interest and retail ownership could continue to put upward pressure on the shares, we think fundamentals will again factor into valuation,” analysts led by Curtis Nagle wrote in a note. “We remain skeptical on the potential for a turnaround.”
Euphoria born in day-trader chat rooms has turned GameStop into the biggest story stock of the retail era, its improbable surge an emblem of the newfound power of individual investors. At the same time, it’s become a major headache for institutional investors betting it would fall.
“It is unwise to try to stand on principle against an angry mob,” said Wedbush Securities Inc. analyst Michael Pachter, who had a price target of $16 for GameStop as of Jan. 11, according to Bloomberg. “The shorts have to mark their investments to market value, so if they’re short at $20 thinking the stock will go to $10 and it goes to $300, they lost $280 trying to make $10. Frankly, I’m surprised they didn’t close much lower than here.”
Online brokerages including Robinhood Markets and Charles Schwab Corp. were hit again by service disruptions as the wild swings transfixed traders. TD Ameritrade told clients in a message that it has put in place several restrictions on some transactions in GameStop, AMC and other securities.
“The thing about these manias is there’s always enough people who make 600% or 1,000% and tell everybody about it that everybody gets excited about it,” said Anne Stevenson-Yang. “The thing is it’s not the majority of those people and eventually a whole bunch of people lose money.
Bloomberg and The Washington Post contributed to this report.