While the commotion around GameStop (NYSE: GME) has subsided, the gamification of the market by retail investors is a wide-open can of worms. For the unfamiliar, retail investors whipped themselves into a frenzy on social media over GameStop with various rationale, from antagonizing hedge fund manipulation to looking to cash in as the stock rocketed up or to just give Wall Street the middle finger.
The technical-minded saw it as a short squeeze, whereby buying up shares would force or “squeeze” short position holders who bet against the stock into higher price shares. The theory was if those short holders were pushed to the end of their short position (which comes with an end date), they would have to buy shares at a high price, further inflating the stock price.
This is nothing new, but the intensity and coordination on social media was quite novel. GameStop stock shot up from $30 to nearly $350 in a matter of weeks and triggered many trading issues. The CEO of Robinhood, the fee-free brokerage where much of the frenzy happened, was even set to appear before Congress to testify about its restriction of trading. Longtime trader and investment writer Roger Lipton said it was nothing short of historic.
“I have been investing for over four decades and I have to say that this degree of speculation in stocks that are already public is unprecedented,” wrote Lipton, as even the dot-com bust was logical by comparison.
It doesn’t seem likely to happen again soon, partially because so many GameStop traders got stuck in the red. GameStop stock fell as fast as it rose, sinking to between $50 and $60 and delivering some tough lessons to retail traders. It does, however, beg the question, could this happen elsewhere? Could it happen to a franchise stock? The key draw for GameStop was a very high short interest, or ratio of free shares that were covered in a short position. In mid-January, short interest was 88 percent, meaning nearly 90 percent of available shares were wrapped up in a short position. That is very, very high. The highest percentage out there at press time was about 40 percent.
Companies in the Franchise Times watchlist appear safe from this kind of volatility. The highest short interest is Regis Corporation (NYSE: RGS) at just over 13 percent. Snap-On (NYSE: SNA) and The Joint (Nasdaq: JYNT) both sit between 9 and 10 percent; the rest of the list falls below there. No short squeeze is likely, but the potential power of a massive group of disgruntled retail traders is yet another market force to watch.