Short Squeeze: Zombie Companies Driving Stock Market Growth

With recent trends, declining companies such as BlackBerry and GameStop are zombies, coming back from the dead.

A bubble gets bigger as growth in the market goes on but the thought of the bubble popping ironically is driving even more growth.

Redditors’ foresight provides a clearer image than Wall Streets’ professionals. 

Companies such as GameStop Corp. (NYSE: $GME) and BlackBerry Ltd. (NYSE: $BB) in the past few days are seeing tremendous surges in their stock prices, despite the initial doubt from investors. With Wall Street analysts forecasting the imminent failure, which has been driven by the past few years of decline and increasing competition, a group of Redditors managed to drive the price up of the stock substantially, which resulted in a short squeeze

The stock value of these companies are hitting all-time-highs and outperforming every company in the S&P 500. Despite the lack of new public information, this brings us to ask the questions of  “Why”, and “When will it stop?”

What is a short squeeze?

By definition a short squeeze is a sudden-sharp increase in a stock’s price, caused by technical factors rather than fundamentals, such as release of new company news to the public. This can be as a result of a sudden lack of supply of a stock while an excessively high demand for the stock. 

Short sellers cause this problem because they believe a stock is going to go down, selling a stock in hopes that the price falls. However, they must purchase more shares of the stock when it rises as they must cover their positions as the stock price goes up

Since this past March, many professionals on Wall Street have been predicting the downfall of companies such as BlackBerry and Gamestop, which was expedited by Covid-19 while demonstrating declining sales. There are a huge amount of short sellers for these companies.

However, with the stock price of these companies going up, these short sellers must purchase (thus demand more) even more shares to cover their positions, causing the stock price to go up, and then forcing them to purchase even more shares. As a result, demand will increase no matter what while supply remains finite

Why did the stock prices of these obviously-declining companies go up in the first place and when will this forced-frenzy purchasing of the stock stop? 

Reality Check from Redditors

On Reddit, there is a popular channel called WallStreetBets. This channel is known for wild investing and trading behaviors by its members. Essentially, the members of this subreddit generate demand for GameStop and BlackBerry through the funds of all the members, who are just retail investors. With over 2.2 million members in this community, the superficial demand created from the channel would certainly boost a stock’s price.

In response to the short sellers on Wall Street, this group of retail investors retaliated by driving the prices of GameStop and BlackBerry, forcing these short sellers to demand the stock as their hopes were to profit from the struggles of these companies.

GameStop, however, grew more than 500% within this week, hitting a price of $150. Blackberry was up 17% on Monday even though the company claims they were unaware of any factors that would be driving up the share prices. 

These Companies are Cat-Fishes

Due to the short squeeze, the stock prices of these companies are growing at insane speeds. However, this is not necessarily an indication that a company’s financial qualities are better and its internal processes are growing. These companies’ stock growth must be differentiated from its business-growth, such as revenue and profitability

With the combination of social media, retail investors, and ease of investing through mobile apps, companies like these definitely will appear trending and attractive. This short-term high-growth of prices will eventually stop as the short sellers eventually cover their position or when the companies issue equity for their operations. It’s very important to understand fundamentals and not look at just technical factors such as stock price.

Next time before I make an investment, I certainly would ask myself: “Does anyone still use a BlackBerry? “Do I still go to GameStop to buy my games?”