GameStop is coming to an index fund near you.STRF/STAR MAX/IPx
Ever since armies of Redditors and traders on Robinhood emerged on the scene in 2020 and 2021, they’ve laid siege to the ivory tower of financial theory.
Efficient markets? Yeah right. Discounted cash flow analysis? No way!
Weekly call options trades have soared to volumes like never seen before and retail trading has, at many times over the past year, dominated total market trading volumes. Meme stocks like AMC Entertainment, BlackBerry and GameStop have sometimes soared to inexplicable levels, pummeling many hedge fund investors.
Now there’s a new stage of the stock market’s hallucinogenic trip.
GameStop, which has risen about tenfold in value in 2021, is being added to a prominent stock market index. The move has the video game retailer poised to enter the passive portfolios of savers with billions invested. SP Dow Jones Indices said on Tuesday afternoon it will be adding GameStop, which trades at a $12.8 billion market cap after its inexplicable 2021 rise, to its SP MidCap 400 Index.
GameStop will join GXO Logistics, a shipping company founded by billionaire entrepreneur Bradley Jacobs, and Victoria’s Secret as additions to the index. GameStop will replace Weingarten Realty Investors, a grocery-anchored real estate investment trust being acquired by a competitor, and Lakeland Financial, a bank holding company, in the index. GameStop will be added to the index on August 4th.
Since late 2020, GameStop has been one of the world’s most actively traded stocks, buoyed by traders using fervent buying of stock and options trades to squeeze the company’s shares. GameStop, they discovered, was one of the most heavily-shorted stocks. If enough traders bought at once, particularly leveraged options, it could force firms making markets on their trades to algorithmically buy more stock. With enough buying pressure, short sellers would be forced to cover their trades, engendering a squeeze that would make the stock prices soar.
That was precisely what happened in January, when a squeeze caused the GameStop to surge to about $350 a share, or a $25 billion market capitalization, a 2000% gain. Shares have since settled at about $180 a share, or just shy of a $13 billion market capitalization, a gain of about 900% year-to-date.
Now the new stage in the GameStop saga may involve passive flows, where index funds buy stocks based on factors like their market capitalization.
Because of GameStop’s surge, it began to qualify for SP’s Midcap 400 index. SP builds the index based on a company’s market capitalization, and positive earnings over a series of four consecutive quarters. Each company is equally weighted rather than weighted by float-adjusted market capitalization. Interestingly, GameStop looks poised to be among the largest constituents of the index.
At a market cap nearing $13 billion, it is just within the index committee’s stated market cap range of $3.6 billion to $13.1 billion. The median market cap of the index is just $5.6 billion and the largest constituent, Bio-Techne Corporation, carries a $17.5 billion market cap, or about 0.8% of the index. Billions of dollars are indexed to the index, including the $2.8 billion (assets) Vanguard SP Mid-Cap 400 ETF.
If anything, GameStop seems like it was fairly close to qualifying for the SP 500 Index.
Its $12.8 billion market capitalization fell just $300 million short of qualification based on that metric. Nonetheless, the index committee still has discretion on what it includes in all indices, including the SP 500, which counts $11.2 trillion in assets indexed to it.