A year ago, we witnessed the epic GameStop short squeeze.
A year might as well be an eternity on Wall Street. Really, a day can feel like an eternity in this line of work.
On January 28, 2021, shares of GameStop Corp. (NYSE: GME) topped out at over $500 per share in premarket trading.
The stock had gone vertical in the previous month, as you can see in the chart below.
You make one or two trades like that in your career with real money, and you’re set for life.
But the story gets better.
This wasn’t a battle between hedge fund masters of the universe. It was the exact opposite.
GameStop was a popular “meme stock” among ordinary retail investors, many of whom were new to the stock market.
The GameStop trade started on a Reddit message board.
As the saga played out, it turned into a battle of David vs. Goliath.
Before it was over, an army of small investors wrecked the professionals — folks who’d heavily shorted the stock. Those newbie traders nearly broke Wall Street in the process!
Many of them used Robinhood as their brokerage of choice, and the app was forced to halt users from buying GameStop and a handful of other meme stocks.
The entire system was at risk of collapsing … over an otherwise unremarkable video game retail shop.
How We Make Money in a GameStop-Like Short Squeeze
We didn’t trade GameStop in my premium research service, Green Zone Fortunes. The stock didn’t fit our criteria.
We did, however, participate in the Great Short Squeeze of 2021!
We made over 100% in less than a month on a beverage brand that’s a favorite of millennials and Gen X alike.
We did it by following the checklist we use every time we research a stock…
- Powerful Mega Trend: We identify stocks that will benefit from powerful, multiyear, industry-disrupting mega trends. In the case of the stock we recommended, its product fit the trend of healthier living, particularly among millennials. We expect this trend to last for years.
- Strong Green Zone Ratings: We identify top-rated established companies, as well as “young” companies we expect to become top-rated — all with the help of the proprietary six-factor rating system I developed. The stock fit the bill here as well. Between the mega trend and the high ratings, we knew we had the makings of a winner.
- Overlooked “X-Factor”: We identify underappreciated “X-factors” that most quantitative models and discretionary strategists miss — the “special something” that promises to propel the stock higher than anyone expects. In the case of the stock we recommended, the cherry on top was its high short interest.
Here’s what I mean by that…
How Short Squeezes Work
When you short a stock, you sell something you don’t own.
You do this by borrowing the shares from another investor. (More accurately, your broker does this on your behalf.)
We all need to repay our debts, of course. You have to give the shares back eventually. You just hope it’s at a lower price.
The more heavily a stock is shorted, the bigger that debt becomes. This creates massive buying pressure that can explode into a short squeeze.
During a squeeze, a rising stock price forces a short seller to buy the shares to cover their short.
That buying pushes the price even higher, causing more shorts to cover, which sends the shares higher still.
The market becomes lopsided, as there are effectively no sellers but many motivated buyers.
That’s what happened to GameStop — and to the stock my readers made a 100% profit on in about a month.
We didn’t have a crystal ball, so we didn’t “know” it would happen. But knew it was a real possibility given the high volume of shares sold short. We knew that there was no way for the shorts to cover without forcing the shares higher.
The market is in correction mode right now, meaning the shorts enjoy their day in the sun.
But this also creates the opportunity to profit from “rip your face off” short-covering rallies.
To get access to the top stock research and recommendations within powerful mega trends, including millennial shopping habits, artificial intelligence and one I call “Imperium,” click here now.
To good profits,
Adam O’Dell
Chief Investment Strategist
