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GameStop Corp. (NYSE: GME) is a popular target for short selling. Over the past few years it has continuously been among the most heavily shorted stocks in the S&P 500, according to Bespoke Investment Group.
Short sellers are betting that the company's once unchallenged dominance in the videogame selling and reselling business will fold as it faces the onslaught of downloadable content and digital delivery.
But despite the expectation that GME was resigned to this fate, the small, but growing, threat of digital competition has yet to deliver a knockout to the retailer's traditional brick-and-mortar videogame business. While the bears have secured some short-term victories, their tendency to pile on with the short selling herd has continued to be their Achilles' heel.
Last year, the shorts were battered by GME's seeming unwillingness to let weak earnings data eat away at its market cap. In spring 2013, GME had reported its worst year in recorded earnings history, with a 7% decline in sales, and finished the year $269.8 million in the red. Yet the stock still soared. From the date of the earnings release to its November 2013 peak, it gained 93.1%.
GME's shares climbed 40.6% from the beginning of 2013 to the end of April 2013, when short selling comprised a heavy 34% of GME shares floated. A correction looked to be looming - so short sellers were salivating at the opportunity to get in on the bet.
But the opposite happened, as GME stock continued to soar. It advanced another 12.7% and was trading at an adjusted close of $37.91 in mid-June, up from $23.92 in the beginning of the year. This surge did work to shake out some of the shorts - the short float had fallen to 30.8% - but they still largely held on.
That is, until the "short squeeze" happened...
How the Short Squeeze Scared Off GME Doubters
To short a stock, a trader must borrow shares from a broker, sell them at market value, then buy them back at a later date and return those borrowed shares back to the broker. The intent is to buy back those shares at a lower price and pocket the difference, thus making a profit off a company's falling value.