Investor Relations is No Game
1 February 2021
By John Nunziati
On January 4th, Gamestop (GME) closed at $17.25. A notably large short interest in the stock of the company had already attracted the attention of the online community of Reddit users in the sub-Reddit r/WallStreetBets. The dialogue in that group identified an opportunity to generate significant buying interest in an attempt to squeeze the short interests and force them to cover by buying shares at even higher prices. On January 11th, the company announced three new board members, including the ex-CEO/founder of Chewy, an online pet food & services company. Interest in Gamestop skyrocketed, a feeding and gaming frenzy took off, and all the pieces came together in the market.
The share price hit nearly $350 on the 27th, rallied to an intraday high of $483.00 before backing off to close at ~$195 on the 28th, and closed at $325 on the 29th. Trading volume ballooned, with almost 600 million shares bought and sold last week, which in addition to the retail “mob” activity suggests a high level of algorithmic and quantitative trading. This all happening to a stock that only has about 70 million total shares outstanding and less than 50 million shares of public float. Meanwhile, similar activity was seen on a handful of other stocks and commodities (such as silver, AMC, & BBY) that were also highlighted on social media platforms. The activity actually was so significant that it resulted in multiple trading halts of certain stocks as well as trading restrictions of certain stocks on popular brokerage platforms such as Robinhood.
Now, the news media, the SEC, Congress, and even the White House are commenting on the situation. There are theories of “Main Street vs. Wall Street” or a band of “Davids” taking on “Goliath” hedge funds. There is even speculation about securities fraud or market manipulation, although no one can clearly point to specific illegalities. There are also predictions of substantial losses for those left holding shares when and if prices fall. On January 26th, the company posted an SEC filing showing a 13% stake owned by Blackrock. On January 28th, they posted an updated SEC filing for MUST Asset Management, noting that as of December 31st, they had ceased to be the beneficial owner of more than 5% of the company. Had they waited to exit their 3.3 million share position entirely at the closing price on the 26th, they could have captured a gain of over $1.1B. So one of their largest institutional holders, an index investor which has to hold unless GME is dropped from the index, remains while at least one major active investor (and possibly many other institutional owners) cashed out. This has all led investor relations professionals to shake their heads in disbelief, shrug their shoulders in confusion, and ask each other what they would be doing if their company was entangled in this financial tug-of-war.
I connected with the members of our Investor Relations Success Platform (IRSP) team and we’ve put together a few points for investor relations teams to consider:
Silence is Not Golden: While this is a wild time, fraught with uncertainty and risk, investor relations professionals have to recognize the need to proactively respond. IROs should be reaching out to their top shareholders. Although there may not be a corporate statement to communicate, investor relations team members can listen to investors and work to understand their views on the recent market activity. It may also be helpful to ask top shareholders about their policies on share lending. This practice is widely recognized as the means which enables short sellers to operate. Understanding the views and practices of your top holders is critical knowledge that you can share with your management team.
Hold the Line: Remind your audience that your company exists to run a business and generate shareholder value over the long-term. Emphasize your strategy, your financial condition, your ability to execute, and the long term market opportunities driving your business. IR does not exist to manage a stock price. Our job is to communicate all of the above, listen to shareholders, and manage expectations. Do not get drawn in on commenting on the current valuation. The valuation is a function of market perceptions, supply/demand, and in this case, intentional price manipulation. The current price for your shares does not affect your growth opportunities, competitive advantage, or performance.
Know the Facts: Be aware of any 10b5-1 plans in effect for your leadership team and board of directors. Know the price levels and the number of shares that can be sold. You don’t want to be surprised by insider sales. Consider halting any plans and request directors hold their positions. This should be top of mind for your general counsel. You do not want the company to be viewed as taking advantage of an unusual or manipulated price spike. Any legal actions brought on by shareholders will look for these sales to place blame or wrongdoing.
Be Intelligent About the Market: Situations like this remind us about how important equity surveillance is. Your surveillance partner is not only monitoring your daily equity trading, but will also have insight on many other factors that are in play as well as have great reads on which stocks and sectors are being impacted by some of the phenomena we’ve been seeing of late. Surveillance analysts are some of the best possible resources to understand not only what is happening on Wall Street but really get deeper insights and understanding into why it is happening.
For example with the GME situation, options volume has been huge and there are trading ramifications of this activity. As option market makers sold calls, they also had to purchase stock to hedge these trades. It is important to be able to explain this activity to senior management and to understand the impact it will have on price movements and volume. GME has now traded over 1 billion shares since mid-January and it is clear that much of this volume is tied to activity outside of traditional equity buying and selling activity. Your surveillance team can help sift through noise like this and give you key insights into how your shareholder list has changed.
They also have a tremendous amount of experience monitoring weekly capital flows data to be able to clearly identify noteworthy trading patterns such as preliminary spikes in Retail trading activity. Just because your stock isn’t necessarily being directly targeted by some of this recent Retail mob activity doesn’t mean there couldn’t be implications such as Retail investors selling out of your stock to free up capital to jump into some of these other popular trades. Without surveillance, senior management would be waiting until May 15th for 13F position updates and perhaps never receive insight into how some of these non-filers are behaving and driving share price movements in your stock.
Also, leverage any relationship with your sell-side analysts. Ask them to share any insightful commentary from their clients with you. This will allow you to remain plugged in and ensure you’re sharing a wide variety of content with your management team.
Lastly, rely on your surveillance partner for insight on short interest levels at your company. They can provide detailed monitoring and analysis to assist you, as well as analyze trading volumes to discern drivers behind deviations from historical levels. Investor relations professionals also have to heighten their vigilance. They need to be on the lookout for activists attempting to take positions by flying under the radar during tumultuous trading sessions and periods such as what we’ve been seeing of late.
Communicate Internally: The need for cross-functional coordination is extremely high. Investor relations teams should be coordinating with their Public Relations counterparts. It may be necessary that the company consider issuing a statement to clarify that “there has been no news from the company”. This approach has often been used when share prices accelerate inexplicably and is usually done without a press release, in messages directly to media contacts. It is also important to ensure the Executive Staff and the Board of Directors are updated on current investor sentiment and market updates gathered from the efforts noted above.