GameStop’s stock price likely to see limited impact from $1,400 stimulus checks, says Bank of America

GameStop
  • The $1,400 stimulus checks being sent to Americans may have a limited impact on GameStop shares, says Bank of America.
  • BofA has been analyzing non-fundamental factors on the shares including trading volume and short interest
  • GameStop is set to release fourth-quarter earnings on March 23.
  • See more stories on Insider’s business page.

GameStop shares are likely to get just a limited bump up in volume activity and price from the $1,400 stimulus checks that most Americans are receiving to help them financially cope with the coronavirus crisis, according to Bank of America.

This year’s rush by retail investors into the videogame seller’s shares has resulted in the stock price climbing at high as $348 from nearly $19 at the end of 2020. Much of the fervor around the often-volatile stock has come from retail investors on the Reddit social-media platform, who ramped up a battle against institutional short-sellers in late January.

Over the past two months, Bank of America has analyzed the impact on GameStop shares from non-fundamental factors including the number of conversations on Reddit relating to the stock, trading volumes, and short interest. The factors “have shown a tight relationship and large increases have corresponded to several big surges in GME’s share price,” the firm said.

Then the bank began taking into consideration the $1,400 checks the government starting sending out this month. It analyzed the number of conservations mentioning stimulus, as well as “stimmies” and stimmy”, on online forums then plotted the data against GameStop’s share performance.

In late December and ahead of the round of $600 stimulus payments sent under the Trump administration, “there was indeed a spike in stimulus mentions and this was followed by an even larger increase over the past two weeks,” from March 2 through March 17.

“These spikes also coincided with significant increases in GME’s share price,” wrote the bank in a note led by Curtis Nagle, director of equity research at Bank of America.

But “the impact going forward may be limited given two factors,” the bank said. First, conservations involving stimulus “appear to have peaked” and GameStop shares have declined over the past few days. Secondly, the number of recent conversations including both GameStop and stimulus “is low. GME trading volumes are also steadily declining and short interest is down materially.”

The next event on the radar for GameStop investors is the release of the company’s fourth-quarter earnings after the bell on March 23. “We expect an underwhelming quarter given previously announced holiday sales results that were very disappointing,” said BofA.

It noted that GameStop shares over the past five months “have reacted very positively to a string of announcements” including a digital revenue-sharing arrangement with Microsoft and the appointment of Ryan Cohen to be in charge of a new committee aimed at driving a turnaround plan. Cohen is the cofounder of pet products retailer Chewy and GameStop’s largest individual shareholder.

Bank of America maintained its underperform rating on GameStop shares “on significant earnings risk ahead.”

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Morgan Stanley says the ‘extraordinary outperformance’ of small caps is coming to an end and the sector will feel cost pressure as the economy reopens

FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York U.S., July 16, 2018. REUTERS/Lucas Jackson/File Photo
FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York

Small caps and cyclical stocks have outperformed during the recession, but their extraordinary run will end soon, Mike Wilson, chief US equity strategist, said on Morgan Stanley’s “Thoughts on the Market” podcast late on Monday.

Since last April, the Russell 2000 index of small-cap stocks has outperformed the S&P 500 and Nasdaq 100 by 50% and 40%, respectively, Wilson said.

Small caps are those stocks that have a total market capitalization of between $250 million and $2 billion. They are likely to be disproportionately impacted by growing cost pressures during economic recovery. These come from concerns about labor availability and supply-chain shortages and are highlighted in recent purchasing manager surveys.

The Russell 2000 is up by around 19% year to date and has gained over 110% in the last 12 months. The S&P 500 and the Nasdaq 100 have risen by 5.7% and 4.4%, respectively so far this year.

The index has been one of the best-performing worldwide in the last year. It has even outperformed the tech-heavy Nasdaq 100, which has gained 75%, thanks to triple-digit percentage gains in the likes of electric vehicle maker Tesla, or video call app Zoom.

Morgan Stanley has therefore downgraded small caps to reduce risk. “Now, we think that period of extraordinary outperformance and earnings revisions and valuation expansion may be coming to an end,” Wilson said.

The bank upgraded the sector last April based on the assumption that “we would experience a V-shape recovery in the economy, and the government subsidy of the unemployment cycle would accrue to the bottom line of corporations, especially small caps”.

Because small caps tend to be very closely linked to the real underlying economy, they gained far more than bigger-caps, which can often be more subject to the health of global trade, exchange rates and other external factors. With the bounceback from the depths of coronavirus-induced recession, small caps enjoyed an even bigger rally and that may be starting to level out, Wilson said.

“The equity market is doing exactly what it should be at this stage of the recovery” Wilson said. Market-based interest rates have shot up significantly since the start of the year, as investors price in the prospect of a rapid pickup in growth, which might mean some correction in equity valuations in 2021.

“This doesn’t mean smaller cap company stocks can’t work; however, the risk-reward at this point is no longer favorable,” Wilson said.

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Retail investors could buy a record $3 billion of US stocks the day they get their stimulus money, one research firm says

Traders work on the floor of the New York Stock exchange
  • Retail investors could snap up a record $3 billion in stocks the day they start receiving their COVID-19 relief funds, says Vanda Research.
  • That could happen as soon as Wednesday or Thursday, when most Americans will start seeing $1,400 deposited into their bank accounts,.
  • Owning small-cap stocks could be a good way to position for this week’s event, says Vanda Research.
  • See more stories on Insider’s business page.

Retail investors could buy a record $3 billion of US equities in a single day when they receive their $1,400 stimulus checks from the US government, according to Viraj Patel, global macro strategist at Vanda Research

The firm says this could happen as soon as Wednesday or Thursday of this week. JPMorgan Chase and Wells Fargo have previously said their customers are slated to start getting the $1,400 checks on Wednesday.

Numerous Americans have already said on social media sites they’ve already received the cash approved by Congress and signed off on last week by President Joe Biden. The aim is to help reinvigorate the world’s largest economy after it was thrown into recession last year because of the coronavirus crisis.

A new round of cash coming into equities would take place at a time that the S&P 500 Index and the Dow Jones industrial average have hit all-time highs, spurred in part by investors rotating into cyclical stocks that should benefit from the recovery in the US economy. Many businesses have been reopening their doors as millions of Americans have received vaccinations to ward off COVID-19 infections.

“But besides just guessing past retail favourites (GME, TSLA, AMC, BB, NIO etc.) in the hope that retail traders will plow their stimulus checks into those stocks once again — we’d think owning small-cap indices (namely the Russell 2000) could be a good way to position for this week’s event,” Patel told Insider via email on Monday.

Vanda Research’s data analysis arm VandaTracks tracks retail investing activity in 9,000 individual stocks and ETFs in the US.

GameStop, AMC Entertainment and BlackBerry have become popular among retail investors who are active on Reddit’s WallStreetBets platform and who drove the January rally in those and other so-called meme stocks.

The small-cap Russell 2000 Index has gained about 19% during 2021, with movie theater operator AMC among its best performers. The company this week will begin showing films again in California, starting in the major market of Los Angeles.

Big buying of US equities on Wednesday would be on the same day the Federal Reserve will release its monetary policy statement. The Fed isn’t expected to make any changes on interest rates but investors will listen for indications from Fed Chairman Jerome Powell about when the central bank will begin to raise interest rates in the face of improvement in the economy.

Read more: Morgan Stanley says to buy these 12 stocks before their unique catalysts drive them to deliver market-beating returns

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