GameStop’s volatile shares rebound surprisingly, Australian dollar slips from three-year high16 min read
GameStop’s share price has made a stunning comeback, more than doubling in the final trading hour in the US, as investors piled into the struggling brick-and-mortar video game retailer.
- GameStop shares were extremely volatile in January, surging up to 2,400pc
- The ASX 200 lifted sharply (+1pc), by 2:45pm AEDT
- Afterpay, Qantas, Flight Centre and A2 Milk reported their earnings today
Its shares skyrocketed (+104pc) to $US91.71 in the final trading hour on Wall Street.
This led to several trading halts in the afternoon session, as there was no obvious reason for the surge.
Shortly before the price surge, GameStop announced on Wednesday local time that its chief financial officer (CFO) Jim Bell would resign on March 26.
“Mr Bell’s resignation was not because of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices, including accounting principles and practices,” GameStop said in a filing with the Securities and Exchange Commission (SEC).
In a research note, Jefferies Research analyst Stephanie Wissink wrote: “We expect GameStop to pursue a CFO with a more extensive tech (versus retail) background, which will be a signal of the direction the company is due to take in coming years.”
The spark in the company’s share price seemed to take posters on Reddit’s popular WallStreetBets forum by surprise.
Meanwhile, Reddit’s website was down shortly after 8:00am AEDT, leaving thousands of users unable to get onto its platform.
Instead, they were greeted with an “Error 503” message, which said the site is “currently unable to handle this request”.
The social media website has since been restored, and it is not yet clear what caused the outage.
More volatility ahead for ‘stonks’
In after-hours trade, GameStop’s share price went up even further (+85pc), suggesting there would be another big jump for the video game retailer’s stock when the New York Stock exchange reopens later tonight (Australian time).
Other so-called “stonks” – an intentional misspelling of ‘stocks’ – favoured by retail traders, also shot higher in Wednesday afternoon trading.
Cinema chain AMC Entertainment gained 18 per cent, while BlackBerry rose nearly 9 per cent.
Shares of Canadian cannabis company Tilray gained nearly 13 per cent.
The retail trading frenzy was the subject of hearings in Washington last week, where Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who had boosted the stock with his videos, reiterated that he was a fan of the stock.
GameStop was the subject of an epic “short squeeze” last month, as amateur traders on Reddit forums helped send its share to the moon — up by as much as 2,400 per cent in less than four weeks.
The retail investors sought to punish hedge funds such as Melvin Capital that had taken outsized bets against the company.
Some of America’s big hedge funds lost billions of dollars as they wrongly bet on GameStop’s share price tanking in January. Melvin said it lost 53 per cent before closing its position in GameStop.
The retailer’s share price hit a record high of $US483 at the end of last month, before crashing to $US53.50 in early February (a week later).
Redditers confused by sudden jump
GameStop devotees on Reddit’s popular WallStreetBets forum were surprised by the sudden jump in GameStop shares today.
“Why is GME going up?” another retail trader asked on WallStreetBets.
“Because we like the stock,” another replied, borrowing a line from Mr Gill (who also goes by the user name “DeepF***ingValue”).
Another user posted, “I missed out on GME [GameStop] the first time, I’m not making that mistake again. TO THE MOON.”
Ihor Dusaniwsky, managing director of predictive analytics at analytics firm S3 Partners, believes short covering was “not the predominant reason for this price move.”
“It’s mostly long buying with short covering sprinkled in to help grease the skids up,” Mr Dusaniwsky said.
Fewer than 18 million GameStop shares were shorted as of Tuesday, down from over 70 million in early January, according to S3.
Basically, when you buy shares in a company, you’re usually betting that it will become more profitable over time. So you’re going “long” on the stock.
On the other hand, if you believe a company’s shares will tank, you can place a bet on its declining fortunes (“shorting” the stock, in other words).
It means you’re borrowing the shares at their current price and selling them to others (even though you don’t own them).
If your hunch is correct, and the share price falls, you can purchase them back from the market at a lower price. You would have made a profit in this situation.
Then you can return the shares to the original lender, and pocket the windfall.
Conversely, if the company’s shares rise unexpectedly, you would have to buy them back at a higher price, return them to the lender and suffer a loss.
In case you made the wrong bet, there are ways to minimise your losses — by “short covering”.
This involves buying the shares back at a slightly higher price (before they jump even further), to avoid a situation where you lose even more cash.
ASX rebounds, Aussie dollar slips from three-year high
The Australian share market has recovered from yesterday’s heavy losses, after Wall Street’s industrial index, the Dow Jones, scaled its latest record high and a sell-off in tech-related stocks eased.
By 2:45pm AEDT, the benchmark ASX 200 index had risen (+1pc) to 6,848. The broader All Ordinaries was up by a similar level to 7,119 points.
Some of the best performers were mining, property and healthcare stocks like Ramsay Health Care (+6.3pc), Nanosonics (+9.9pc), Sandfire Resources (+8.1pc) and Lendlease (+4.4pc).
On the flipside, some of the heaviest losses were felt by gold miners Regis Resources (-6.3pc), Ramelius Resources (-6.8pc) and Northern Star (-3.5pc), along with Service Stream (-19.3pc), JB Hi-Fi (-3.8pc) and Kogan (-3.7pc).
Shares in buy now, pay later company Zip Co dropped (-8.4pc) to $10.86.
Zip reported its half-year net loss had ballooned to $453.8 million. It was much higher than its $30.3 million loss in the same prior corresponding period.
Its massive loss includes accounting adjustments which relate to its US division (Quadpay) totalling $306.2 million, and acquisition costs of $7.8 million.
However, the company said its number of active consumer accounts increased to over 5.7 million (a big improvement from the 1.8 million it reported a year ago).
It also saw a huge boost in transaction volumes to $2.3 billion (compared to $964.7 million, a year ago).
Meanwhile, the Australian dollar jumped to a three-year high of 78.78 US cents on Thursday morning.
However, it has since retreated to 79.6 US cents by the afternoon.
The volatile cryptocurrency bitcoin recovered somewhat, up 0.8 per cent at around $US50,805.
NAB sued for overcharging customers
The corporate regulator has filed a lawsuit against the NAB, alleging that it charged customers fees for periodic payments for which it was not contractually entitled to do so.
Basically, periodic payments are automatic “set and forget” fixed-amount payments put in place by the customer.
They are an alternative to direct debit arrangements, and allow customers to establish a regular payment to another account, for things like fortnightly rental payments.
Banks may charge a fee for this service, depending on the terms and conditions for the account.
The Australian Securities and Investments Commission (ASIC) alleged that between February 2015 and February 2019, the bank charged fees for periodic payments more than 195,000 times, totalling $365,454.
It also alleged that NAB had identified the error in charging both personal and business banking customers by October 2016, but did not notify customers and lodge a report with ASIC until almost two years later.
“By charging the fees, or by notifying customers of the charging of each fee via a bank statement, NAB made false or misleading representations that it was contractually entitled to charge the fees when it was not,” ASIC wrote in a statement.
The nation’s third largest lender has faced multiple lawsuits since it was heavily criticised during the 2018 banking royal commission for charging customers “fees for no service”.
Shares in NAB, Westpac and Commonwealth Bank lifted sharply (up 1 to 1.4 per cent), while ANZ has risen by a more tepid amount (+0.2pc).
Afterpay sales double, seeks to expand overseas
Afterpay reported its half-year loss widened to $76.5 million, despite some analysts forecasting the company would report a profit for the first time.
In comparison, its loss (in the six months to December 2019) was $28.8 million, meaning it has worsened by 165 per cent since then.
Its sales, however, also more than doubled, spurred on by strong holiday shopping particularly in the United States.
The buy now, pay later company and its global competitors such as Sweden’s Klarna, Affirm and Zip Co have witnessed explosive growth since the pandemic locked down much of the world and turned more people toward online shopping.
The value of transactions done through Afterpay rose to $9.8 billion in the six months to December 31 (twice that of the $4.8 billion processed a year ago).
Afterpay processed $4.2 billion in transactions in North America, largely in the US, the industry’s biggest prize, and saw active customers rise 1.6 million to 8.1 million in the December quarter.
Active customers using the payment platform shot up 1.9 million to 13.1 million in the three months to December.
The company said on Thursday it was exploring the potential for its shares to also be listed overseas amid increased US investor interest.
Shares in Afterpay last traded at $134.36, and were placed in a trading halt ahead of its results announcement, as it tried to make an extra $1.25 billion through capital raising by issuing convertible notes.
Afterpay’s share price has surged by more than 1,500 per cent, since its low point in late-March when it briefly crashed to $8.01.
It is now Australia’s 12th biggest company, according to its value on the share market.
However, the market remains divided on Afterpay’s prospects, with UBS especially feeling bearish with its “sell” rating on the payments company’s stock.
“Cumulatively, Afterpay has now raised more than $2 billion in capital since last July,” UBS analysts led by Tom Beadle wrote in a note.
Mr Beadle noted that Afterpay’s equity free cash flow in negative territory, at -$587 million in the six months to December 31.
On the other hand, analysts RBC Capital Markets have put an “outperform” rating on Afterpay.
“Today’s result saw all key metrics heading north,” RBC analyst Tim Piper wrote in a note.
“Data points which stood out were earlier customer cohorts transacting 29 times per year (versus 25 times previously) and average 12-month frequency across all customers at more than 15 times (up 30 per cent on the prior corresponding period) in Australia and New Zealand.
“Customer acquisition in the US was strong with around 600,000 customers acquired in December alone.
“Repeat rates are now at 91 per cent with good traction in all regions, including the UK.”
Border closures decimate Qantas and Flight Centre
Qantas has announced a $1.1 billion half-year loss, which was blamed on state and international borders being closed, and Victoria’s extended lockdown last year. The company will be able to offset part of its loss against future tax bills.
It also revealed its revenue, for the six-month period to December, plunged by three-quarters to $6.9 billion.
The airline confirmed it still has about $4 billion in available cash to keep afloat until Australia’s international border reopens and domestic travel ramps up to more normal levels.
In a statement, Qantas said it now expected international travel to restart at the end of October, as recent state border closures have “delayed the Group’s recovery by an estimated three months”.
The exception is trans-Tasman flying, which it expects to resume in July.
Unsurprisingly, Qantas won’t pay an interim dividend this year, though its share price jumped (+3.5pc) to $5.18.
Meanwhile, Flight Centre has swung to a massive $233.2 million half-year loss, a steep downgrade compared to its $22 million profit in the prior corresponding period.
Its revenue was almost obliterated by border closures, plunging (-87.6pc) to $159.8 million. In comparison, its revenue in the six months leading up to December 2019 was $1.5 billion.
“The conditions we have encountered since March last year have undoubtedly posed the greatest challenge that our industry and many others have faced,” said Flight Centre managing director Graham Turner.
“We have become a leaner and more efficient business with a long liquidity runway, which has been crucial during this challenging and uncertain period.”
Flight Centre will not pay its shareholders an interim dividend, but its shares leapt (+7pc) to $17.49.
Chinese buyers abandon A2 Milk
Shares in A2 Milk plunged 15.7 per cent, near its lowest level in two years ($8.79).
That was after the New Zealand company said it expected full-year revenue to be at the lower end of its guidance range (NZ$1.4 billion to NZ$1.55 billion), as the COVID-19 pandemic has disrupted sales in its key Chinese market.
The dairy producer also posted a 35 per cent slump in first-half profit (to $NZ120 million), and said it expects a lower EBITDA (earnings before interest and tax) margin range of 24 to 26 per cent for the full year as a result of lower revenue.
The company’s woes are mainly due to disruptions in its “daigou” channel, where people outside China buy products for Chinese consumers and import them informally. The channel accounts for a significant portion of A2’s revenue.
“While there was some improvement in the channel towards the end of the period, the recovery was not as strong as had previously been expected,” A2 said in a statement.
The company’s heavy dependence on the Chinese daigous has come under scrutiny in the wake of the pandemic, as it was forced to issue a series of earnings downgrades in 2020, admitting that the hit to the channel was worse than initially expected.
“The weaker than expected outlook is likely to disappoint and the lack of capital management may increase investor doubts around whether A2 will have to downgrade its guidance again,” Citi Research said in a note.
The current outlook assumes that the daigou channel will improve significantly in the later half of this year, which may be challenging without the return of students and tourists and the ongoing resurgence in Chinese domestic brands, Citi says.
Surprise jump in business spending
Australian business investment experienced a bigger-than-expected 3 per cent bounce in the December quarter, a promising sign for the economic recovery.
The level of investment rose (+3pc) to $29.4 billion in the last three months of 2020, the latest figures from the Bureau of Statistics (ABS) showed.
It was the first increase since end-2018 and the biggest since September 2013, with a surprise pick-up in spending for new buildings and equipment.
This increase was all due to non-mining activity, mostly construction, accommodation, food services and transport postal and warehousing led by demand for online shopping.
In a welcome sign, Australian firms seemed a little more confident about the future, with the latest estimate for spending plans for 2020/21 revised up to $121.4 billion.
“We had expected a fall … Instead, the result indicates that with the business mood upbeat, firms have opted to increase spending in response to the rapid rebound in activity conditions as COVID restrictions are rolled back,” said Westpac economist Andrew Hanlan.
“The backdrop is the economy is recovering and conditions have surprised to the upside.
Business investment is a critical driver of productivity growth in the economy and the Reserve Bank (RBA) has often referred to the need for the return of “animal spirits” to support a recovery.
Data next week is expected to show Australia’s $2 trillion economy grew at a rapid clip in the December quarter as it emerges from its first recession in three decades led by massive fiscal and monetary stimulus.
The RBA slashed interest rates three times last year to an all-time low of 0.1 per cent, and launched a massive quantitative easing programme (colloquially referred to as “money printing”) while the government boosted spending as well.
Dow hits new record
“What’s driving the stock market is the fiscal stimulus, the dovish Fed, the real strong, strong earnings that we’re seeing, as well as the fact that we’re going to have a third vaccine,” said Richard Saperstein, chief investment officer at Treasury Partners.
The US Food and Drug Administration said Johnson & Johnson’s one-dose COVID-19 vaccine appeared safe and effective in trials, paving the way for its approval for emergency use as soon as this week.
On Wall Street, the Dow Jones index had jumped 425 points (or 1.4 per cent) to close at 31,962, its highest level ever.
The broader S&P 500 rose (+1.1pc) to 3,925 points.
The tech-heavy Nasdaq Composite went up (+1pc) to 13,598, after managing to recover from a steep fall earlier in the session.
The S&P 500 financial sector hit a fresh record high, while other cyclical stocks including industrials, energy and materials also rose.
Microsoft, Amazon and Apple were down roughly between 0.4 and 1.1 per cent, while Facebook, Netflix and Alphabet (Google’s parent company) reversed earlier declines.
Inflation worries ease for now
In the past few days, there was a big rotation out of growth stocks in tech-related sectors as more investors put their money into cyclical sectors like banking, oil and travel on bets the global economy would recover relatively soon from the COVID-19 pandemic.
Investors were also worried that an economic recovery meant inflation would rise, as signalled by rising bond yields, which might lead to central banks and governments rolling back their stimulus measures — namely trillions of dollars worth of of “cheap money” and record low interest rates.
This change in policy would make some of their investments — particularly in tech stocks which pay no dividends, are not earning profits (or earning very modest profits), but are trading at record highs — look particularly overvalued.
However, global markets rose overnight as Jerome Powell, chairman of the world’s biggest central bank the, US Federal Reserve Chair, reassured markets that they didn’t need to concern themselves with that.
Mr Powell told US lawmakers on Wednesday it could take more than three years to reach the Fed’s inflation goals, a sign it plans to look beyond any post-pandemic spike in prices and leave interest rates unchanged for a long time to come.
Crude oil rose to fresh 13-month highs while gold prices fell, as surging US Treasury yields and a firmer US greenback weakened demand for the safe-haven metal.
Brent crude futures jumped (+2.5pc) to $US66.98 a barrel. Since the year began, they have surged by around 28 per cent.
Spot gold fell (-0.3pc) to $US1798.13 an ounce.
The rapid rollout of vaccines, as well as news that Johnson & Johnson’s one-shot vaccine appeared safe and effective, was boosting economic optimism but also inflation concerns, chief market strategist and senior trader at Incapital in Minneapolis, Patrick Leary, said.
While rising rates give stock investors pause, the Fed is “pretty comfortable” with rising yields as they take some of the froth out of the financial system, he added.