The stock market has never been so fickle. One moment the recovery is being led by growth-focused technology stocks and the next, it’s a rotation towards cyclical. What’s driving the recent uptick in unloved stocks such as GameStop [GME] and BlackBerry [BB]?
GameStop had been flat for most of 2020 until it began a massive rally, climbing 1,022% year-to-date (as of 28 January’s close). The video game retailer’s business model has been out of favour with investors for a long time. However, institutional interest coupled with a board reshuffle on 11 January sparked a sudden rally.
GameStop's YTD rally
Meanwhile, BlackBerry’s share price has also seen a sudden rise in interest this year. It climbed just 3.3% in 2020, but since recent reports revealed that it sold 90 patents to Huawei and settled a patent lawsuit against Facebook [FB], BlackBerry’s share price has rallied. The stock was up 122.64% so far in 2021 (as of 28 January’s close).
While these stocks are seeing a resurgence of positive investor sentiment — and not just because they were held back by stay-at-home orders — can the momentum continue?
A new game
GameStop’s share price has been soaring since its announcement on 11 January that it would appoint three new directors, following an agreement with RC Ventures.
According to analysts, the positive news prompted a short squeeze — when short sellers are forced to buy more shares to cover their bets to temper accumulating losses — on the video game retailer’s stock. This sent GameStop’s share price upwards by 57.4% on 13 January — then its biggest one-day gain on record.
Interest from amateur investors who frequent the WallStreetBets Reddit page has pushed the stock even further, with GameStop’s share price gaining an incredible 134.84% in one day on 27 January.
Unsurprisingly, the stock then saw a pullback on 28 January, dropping 44.29%. This still left GameStop’s share price up more than 1,000% since the beginning of January, however.
Michael Pachter, an analyst at Wedbush Securities, remains bearish on the stock with a $16 price target. Pachter told Barron’s that he thinks the short squeeze was spurred by “Robinhood-type retail enthusiasm” betting on an ecommerce transformation.
Ten analysts polled by MarketScreener also echo the bearish outlook, with no analysts rating it a buy.
As the fight between bulls and bears continued, Andrew Left, managing partner at Citron Research, made his bearish stance very clear. “This is a failing, mall-based retailer,” he told Markets Insider. “The amount of people who are so passionate about putting GameStop higher, not because of any fundamentals, just shows the natural state of the market.”
"[GameStop] is a failing, mall-based retailer" - Andrew Left, Citron Research
BlackBerry’s comeback act
The cybersecurity software company, which made BlackBerry mobile phones in a past life, has been one of Wall Street’s least-loved stocks. Of nine analysts currently polled by Market Screener, all appear to be either neutral or bearish, with a consensus underperform rating.
Despite the downbeat guidance, BlackBerry’s share price has outperformed the S&P 500 so far in 2021 and closed 201.4% above its median price target on 28 January, set at $4.86 among the nine analysts.
Looking at the macro picture, cybersecurity — as an investment theme — is likely to be a massive growth area in the years ahead. The global market size was valued at $66.8bn in 2019 and is forecast to grow at a compound annual growth rate of 8% to $91bn by 2023, according to The Business Research Company.
John Zechner, founder of J Zechner Associates, is one portfolio manager that’s bullish on the stock, citing a solid balance sheet and strong free cash flow generation. “I think what [CEO John Chen] has done in terms of changing the direction of this company from a smartphone maker into a cybersecurity [company] has been fantastic,” he told BNN Bloomberg.
Despite the company’s 18.3% year-over-year decline in revenue to $218m during the quarter ended 30 November 2020, Zechner believes BlackBerry could also be a prime takeover target.
“First of all, obviously, someone will take a run at this thing at some point. It’s an easy fit-in target for one of the larger [companies],” he explained. “But even without that on a valuation basis, I think it’s good.”
"Someone will take a run at this thing [BlackBerry] at some point" - John Zechner, J Zechner Associates
When determining whether an unloved stock is a worthy investment from a valuation standpoint, Quint Tatro, president of Joule Financial, explains that it is important to look at the balance sheet.
“The first thing we look at when stocks are out of favour, especially in such a very strong market like this, is: Why? Is there a structural or some sort of fundamental issue, or has it just kind of fallen out of favour, maybe because of news headlines, etc.?” he told CNBC.
For example, the underlying investment case for AT&T is strong, as its business taps into both the 5G and video-streaming themes with its fibre-optic cables and HBO Max products.
It’s impossible to predict with certainty whether or not these stocks will continue to bounce back, but the possibility will make them ones to watch for many investors.
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