(Getty)
  • An army of small investors have taken on Wall Street professionals - and they seem to be winning.     
  • They are buying shares in a struggling company called GameStop, and the resultant rally is costing hedge funds billions in losses.  
  • These funds have taken massive short positions in GameStop.
  • Steinhoff has seen an almighty rally of its own in the past week, and could be a next target for these investment vigilantes. 
  • For more articles, go to www.BusinessInsider.co.za.

It has been quite the week in markets, with some large hedge funds bleeding billions of dollars after losing a battle against an army of small investors.

It all started when a group of participants in an investment discussion group on Reddit, a social media platform, plotted together to start buying shares in GameStop, which owns a chain of shops that sell computer games in physical format. The company has been in decline for many years, and large hedge funds have taken massive short positions in its shares.

What is short selling?

It’s a way of making money from shares that fall. Short sellers borrow shares from shareholders in a company – with a contract to return the same number of shares to the owners at a later date. They then sell these shares, betting they can buy the shares back later at a much lower price.

For example, they sold 1,000 shares for R10 each, pocketing R10,000, with an agreement to replace the borrowed shares in a month’s time. When they have to replace the shares, the company is now trading at R8 – so they only need to pay R8,000. Profit: R2,000, minus a fee for the “borrowing” contract, and trading costs.

The small investors started piling into the shares, driving up the GameStop price by 2,500% since the start of the year. This was disastrous for the large hedge funds: they now have to buy back shares at sky-high prices, leaving them with large losses.

READ | How day-traders are using Reddit to upend the stock market and make money in the process

Now, investors are wondering what the next target could be, with Steinhoff emerging as a potential front runner.

Global hedge funds hold short positions in the company’s shares, believing that Steinhoff will probably buckle under its debt burden and legal claims.  

But the share has seen massive buying this week, with trading volume the highest since July last year, and its share price up 60% in a single week – and now 200% higher than its lowest point over the past year.

Steinhoff share price (in blue) and trading volume (in green and red). Source: Investing.com/Johann Biermann

South Africa’s best-known short-seller, Protea Capital Management CEO Jean Pierre Verster, believes the sudden interest in Steinhoff is partly due to investors looking for the next potential GameStop. Verster rose to fame after he took short positions in African Bank and Steinhoff, which turned out to be quite profitable for his investors after the near-collapse of both companies.

Jean Pierre Verster

While it was initially thought that renewed plans to list its European retailer, Pepco, and a solid trading update from Pepco, may be driving this week’s gains – Verster believes it’s also likely that investors are targeting Steinhoff because of the relatively large short positions in the share (some 6% of total shares).

Chantal Marx, head of investment research and content at FNB Wealth and Investments, thinks that Steinhoff may be the most likely JSE-listed contender for a GameStop-like campaign.

It won’t come from local retail investors though, as the community of small traders is not big enough. But Marx says Steinhoff, which is also listed in Frankfurt, could be targeted by European traders.

Steinhoff is indeed under lively discussing by the WallStreetBets Reddit community, who exploded the GameStop share price, in various threads this week, including one entitled “Steinhoff the next better gme [GameStop]”.

But Verster says only a hundred or so traders seem to be taking part in these Steinhoff discussions, and that momentum has started to fizzle out.

Also, he believes the Steinhoff buying will end in tears.

Steinhoff has a debt burden of €9.7 billion (almost R180 billion) and is facing large legal claims for misleading its shareholders.

“The Pepco IPO won’t solve its debt issue, as well as the large settlements it still has to make,” Verster says.

While its share price is now trading above R2, Verster reckons it has a negative fair value – meaning that after all its debts and other liabilities are deducted, the company is worth less than nothing.

The only way that Steinhoff would actually be worth something is if its Pepco listing attracts a very high valuation, and its debt holders agree to convert a portion of their debt into shares in the company, Verster says. Those who are currently buying the shares are betting that both of these events will transpire, in his opinion.

Other companies that have similar profiles to GameStop are PPC and Nampak, which are struggling under large debt burdens and are presumed to be heavily shorted – although there is no official public information about the extent of short selling individual shares in South Africa, says Verster.

Investment banks typically compile their own lists based on internal information. According to a list from one of the largest banks, which was shared with Business Insider SA this week, the most shorted stocks in South Africa are:

  • MTN
  • Brait
  • Reunert
  • Steinhoff
  • Massmart
  • Hyprop
  • Discovery
  • Telkom
  • Implats
  • Capitec
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