Modern Portfolio Management: Moving Beyond Modern Portfolio Theory by Todd E. Petzel

Author:Todd E. Petzel [Petzel, Todd E.]
Language: eng
Format: epub, pdf
Tags: Business & Economics, Investments & Securities, Portfolio Management, Finance, Wealth Management, General
ISBN: 9781119818199
Google: FjVCEAAAQBAJ
Publisher: John Wiley & Sons
Published: 2021-09-08T00:03:54.758523+00:00

8.3 MARKETS: ALLOCATORS OF CAPITAL OR SOCIAL REENGINEERING?

Websites like Seeking Alpha, active since 2004, offer investment-minded individuals a loosely structured forum allowing for an exchange of ideas. Contributors are supposed to disclose positions that they own or anticipate having for full disclosure. Most contributors appear to be aspiring stock analysts and traders, unconstrained by the limits that come with working for a regulated entity like a broker or a bank. The reality is that everything listed in Seeking Alpha should be assumed to be someone talking about their book until proven otherwise.

As 2020 was drawing to a close the intersection between stock market investing and social media grew much larger. Participation in Reddit-hosted groups began to explode with activity. Like Twitter, almost anything can be said, and often is. A theme that began to get traction was that small traders linked by social media could be strong enough to take on Wall Street hedge funds. Their targets were often identified through regulatory filings that large owners or sellers of stock are required to file with the SEC.

One such target was GameStop, a Texas-based retailer that built its business primarily as a reseller of used video games played on consoles like Xbox and PlayStation. Over time more and more of the commerce in video games migrated to digital downloads, eroding the size of GameStop's market. These changing fortunes were reflected in its share price. At the start of 2016 GameStop (ticker: GME) was trading at $32 per share. By January 2017 the stock was at $24. During 2017, a year when the S&P 500 was up every month, GME fell over 30% to $17. The decline continued over the next two years, with GME starting 2020 in the $6 a share range. For many, GameStop was a classic example of a “melting ice cube” company.

It did not get easier for GME in early 2020. When the reaction to the pandemic started to hit the stock market in February, the drop of 34% in the S&P 500 in five weeks was the fastest drop for the index of that size in history. For all of Q12020, the S&P 500 dropped almost 20%, and GME dropped by almost half, not atypical for small-cap stocks at the time that suffered more than the largest, best capitalized companies. There was a 30% rebound in Q2, but the true change in fortunes was yet to come.

At the June 2020 annual meeting of GME, two candidates backed by activist investors won board seats, a sign of shareholder frustration with the direction of the company. Additional activist interest built, and on 11 January 2021, the company announced that it was expanding its board from 10 to 13 and planned to add Ryan Cohen, co-founder and former CEO of Chewy.com and two other previous Chewy senior colleagues. This was the spark that began a tumultuous three-week period.

The stock quickly jumped higher on the Cohen announcement, but there was more at work than just optimism for an e-commerce veteran breathing new life into a traditional brick-and-mortar retailer.

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