Throughout 2021, I’ve been periodically weighing in on the original meme stock –GameStop (NYSE:GME). My message has been to have fun trading GME stock, but don’t buy and hold it for the long term.
I’ve taken a lot of heat this year for simply pointing out that the share prices of GameStop, AMC Entertainment (NYSE:AMC) and other meme stocks don’t have any connection to the true value of their underlying companies. I never would have guessed that AMC and GME stock would still be trading as high as they are today. After all, it’s been nearly eight months since the original meme stock short squeeze.
“Markets can stay irrational longer than you can stay solvent,” economist John Maynard Keynes once famously said. That philosophy is exactly why I have never recommended traders take short positions in any meme stocks.
However, GME stock investors should remember that markets don’t remain irrational forever.
GME Stock Conspiracy Theories
The first part of the GameStop bull thesis is the conspiracy theory thesis. This thesis is that hedge funds have historically rigged the game against stocks like GameStop. They dump billions of dollars into shorting the stock, driving its share price into the ground.
Many GME stock bulls also believe there is a tremendous amount of illegal naked short selling happening. They have told me they believe regulators are in on the fraud and look the other way when large amounts of shares fail to deliver.
When I point out things like GME stock short interest is down 88% year-to-date, I have been told that I am one of many journalists that are also being manipulated by hedge funds into spreading lies in the financial media.
For the record, I have never been paid a single dollar by a hedge fund. I suspect virtually no other journalists have either.
GameStop Transformation Story
The second part of the GME stock bull thesis is that the company is a turnaround story.
GameStop’s annual revenue peaked way back in 2012. Even before the pandemic, GameStop reported a 3% drop in revenue and a $673 million net loss in 2019.
GameStop bulls say Ryan Cohen is transforming the company into the Amazon (NASDAQ:AMZN) of gaming. Some say GameStop will ultimately be the next major streaming platform or social media platform for gamers.
These bulls acknowledge that things are currently bad. In the first quarter, GameStop reported revenue that’s down about 30% from three years ago. But these investors are optimistic the company will transform into something completely different in the future.
How to Make Your Life Easier
Yes, GameStop may be the next Amazon. It may be the next Twitter. It may be the next Twitch. Ryan Cohen has put together a solid turnaround plan.
But take a second and Google J.C. Penney, Sears or Blockbuster Video and “turnaround plan.” The reality is that every struggling company has a turnaround plan. If management doesn’t have a plan, they lose their jobs.
Turnaround plans almost never work. Yes, there are exceptions. But why would you invest in a rare exception when you could invest in the rule?
Say you are a conspiracy theorist that believes Wall Street is rigged and hedge funds control the market. You believe they pay off the regulators and pressured Robinhood (NASDAQ:HOOD) to halt trading and have journalists like me as puppets. Why would you try to win a game that’s rigged against you? That’s not a very smart investment.
In fact, it makes a lot more sense to play a game that you think is rigged in your favor. High-quality cash cow stocks like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are among the largest hedge fund holdings. If Wall Street always screws over the little guy, why not buy what Wall Street is buying?
I love shopping at GameStop, and I doubt the company is going bankrupt any time soon. But I think the chances of a major turnaround are very slim.
Don’t buy GME stock and hope you stick it to the hedge funds. Invest in high-quality, profitable growth stocks and enjoy all the money you will make in the long term.
On the date of publication, Wayne Duggan held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.