Should Investors Buy Into the Recent Lululemon Athletica (LULU) Hype

Posted on by The INO.com Team

The month began with athletic apparel retailer lululemon athletica inc. (LULU) reporting its earnings for the first quarter of the fiscal year 2023. The company surpassed both top-line and bottom-line expectations to take the Street by pleasant surprise. Its revenue jumped 24% year-over-year to $2 billion, while its earnings per share came in at $2.28.

While decades-high inflation and increased borrowing costs instituted to rein it in have been weighing heavily on consumers’ budgets and forcing middle-income consumers to trade down the value chain to budget-friendlier options, high-income segments have been relatively unaffected.

Hence, LULU, which sells high-end yoga pants, shoes, and other athletic wear, said it had seen no changes in its customers’ shopping habits. In fact, despite raising its prices around this time last year, the retailer still found shoppers flocking to its stores and filling up their digital carts. This led to 13% and 16% year-over-year increases in comparable store sales and direct-to-consumer net revenue, respectively.

According to CFO Meghan Frank, LULU has also been helped by lower air freight costs and the reopening of the Chinese economy, as the revenue from the country alone grew by 79% from the previous-year period when about a third of its 71 stores there were closed due to strict restrictions under its “Zero-Covid” policy.

As a result, LULU’s gross margins increased 3.6 percentage points to 57.5% in the quarter, above the 56.7% analysts had been expecting. The company’s stellar performance has encouraged it to expect its second-quarter sales to be in the range of $2.14 billion to $2.17 billion, representing growth of about 15%, and diluted earnings per share to be in the range of $2.47 to $2.52 for the period.

For the full year, LULU has raised its guidance. The company expects its revenue to be in the range of $9.44 billion to $9.51 billion, up from a previous range of $9.31 billion and $9.41 billion. Also, it expects EPS to be $11.74 to $11.94 compared to the earlier estimate of $11.50 to $11.72.
Moreover, it expects to open 50 net new company-operated stores in the fiscal year, with a majority of 30 to 35 planned for international markets expected to open in China.

The bullish outlook was promptly reflected in the price action, with the stock surging by more than 12% in extended trading after the earnings release.

Our Take

Notwithstanding LULU’s bullishness regarding its prospects, retailers across the industry have cited a pullback in discretionary spending and higher-ticket items. In fact, during the earnings call of Nordstrom, Inc. (JWN), its executives noted that although the high-end customer is “pretty resilient,” they’ve also become more cautious.

Secondly, with the $500 million acquisition of Mirror in June 2020, fueled by misplaced expectations that people would continue to exercise at home, even after Covid pandemic restrictions ended and gyms reopened, turning out to be a dud, LULU’s at-home fitness business is in jeopardy.

While the company has approached its competitor, Hydrow as a potential buyer for Mirror, it has since incurred $443 million in impairment charges and has rebranded its at-home fitness business as Lululemon Studio. The segment has also pivoted from being solely hardware-focused to launching a new digital app that gives its members access to its fitness classes without needing to buy its hardware.

Lastly, but perhaps most importantly, as mentioned earlier, sales growth in China over a small base during the previous year-period due to strict public-health restrictions has been responsible for LULU’s recent outperformance. Achieving a similar growth rate this time around will be challenging in an economy whose faltering recovery is evident from the 7.5% year-over-year decline in exports in May.

More ominously, for a company whose primary target segment is the young and upwardly mobile, China is facing a demographic decline. Moreover, high competition and a grueling “996” work culture have been giving rise to countercultural trends such as “tang ping” (lying flat in Chinese) and “bai lan” (let it rot) while driving an ever-increasing switch from a white-collar job to “qing ti li huo” (or light labor in Chinese).

Bottom Line

While the momentum of LULU that is expected to sustain itself in the second quarter could help traders make quick money by the time the company’s next earnings release is due, seldom, if at all, has big money been made by investors buying what is hot on the Street.

Analyzing the Future of Retail Stocks and How Investors Can Stay Ahead

Posted on by The INO.com Team

After registering 0.2% and 1% declines for two consecutive months, on May 16, the advance sales report showed a recovery of 0.4% in retail sales for April. However, this modest rebound missed the Dow Jones estimate of a 0.8% increase.

This muted outlook has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed the earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.
Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from the previous expectations of $23.7 billion to $24.2 billion. The company now expects earnings per share of $2.70 to $3.20, significantly down from the previous guidance of $3.67 to $4.11.

With M joining its peers, such as Nordstrom, Inc. (JWN) and Dollar General Corporation (DG), in reporting lackluster performances, let’s explore what this means for the prospects of retail businesses relative to another sector that has been claiming a greater share of consumers’ budget lately.

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

With consumer debt pushing past $17 trillion to come in at an all-time high during the previous quarter, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April carried out by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

As a result, the middle-income and aspirational consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money which has gotten dearer, as has been witnessed in other periods of economic slowdown throughout history.

Hence, they have been forced to trade down to budget-friendly retailers, such as Walmart Inc. (WMT), which usually cater to low-income consumers leaving the businesses that offer something in between being wrong-footed and stranded.

Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment, who have been frequenting such stores to shop for groceries and other non-discretionary products, contributing to most of the sales.

Consequently, weaker sales have cut across Macy’s brands, including higher-end Bloomingdale’s and beauty chain Bluemercury. According to CEO Jeff Gennette, the “aspirational customer” who shopped more luxury brands has dropped off as stimulus money has dried up.

Likewise, warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members are ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life.

However, a decline of 0.3 percentage points in the overall outlook for inflation over the next year suggests that things could improve, but probably not before they worsen.

Despite current economic uncertainties and hardships, high-income segments have been relatively unaffected, with affluent patrons queueing up for finer things in life on offer from the likes of Tiffany & Co. and LVMH.

Another sector that’s seemingly unaffected by the mundane hardships of the retail businesses is the colorful world of leisure travel. While the pandemic is firmly in the rearview mirror, there is enough pent-up demand from consumers ever keener to redeem their pile of airline miles and other travel rewards on their credit cards through revenge travel.

Moreover, with a jump of 0.8% in spending in April, with personal consumption expenditure beating estimates to rise 0.4% for the month despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why airlines, such as American Airlines Group Inc. (AAL) have turned to bigger airplanes, even on shorter routes, to help ease airport congestion and find their way around pilot shortages.

As a result of this tailwind, AAL’s revenue surpassed the airline’s cost to help it report a $10 million profit during the first quarter of the fiscal year. Moreover, with fuel prices yet to rise significantly due to a stuttering recovery of the Chinese economy and Memorial Day travel topping 2019 levels, the operator has raised its adjusted earnings outlook for the second quarter.

Down at sea, cruise liners such as Norwegian Cruise Line Holdings Ltd. (NCLH) have also found it smooth sailing, with the cumulative booked position for 2023 coming in higher than 2019 levels and occupancy of 101.5% during the first quarter also exceeding the company’s expectations.

The increased demand for, and consequently expenditure on, services and experiences are also evident in the recent employment data, with leisure and hospitality adding 208,000 positions out of the expectation-beating private sector employment increase of 278,000 for the month of May. The sector was also a notable contributor to the increase of 339,000 in non-farm payrolls for the month.

The altered priorities of consumers are also reflected in the stock price action. While M’s stock slumped by more than 19% YTD, AAL and NCLH gained around 19% and 43% over the same period.

Looking Ahead

While it would be an understatement to say that the momentum is firm in the travel and hospitality sector, it might be wise to consider certain things before indulging in the willful suspension of disbelief and extrapolating beyond the foreseeable future.

Since the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remanent of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of travel and hospitality businesses.

Moreover, since technology companies such as Apple Inc. (AAPL) and Meta Platforms, Inc. (META) are finding increasingly innovative ways to immerse people in experiences without needing them to leave their homes, long-term investors with significant leisure and travel sector could find themselves looking nervously over their shoulders over time.

However, businesses in the retail sector, especially the non-discretionary variety, should be able to help their stakeholders sleep easily, knowing that while wants and desires are temporary, needs are permanent, and technology can’t single-handedly fulfill them (yet).

3-D Printed Homes Could Be the Newest Craze – 3 Stocks Set to Benefit

Posted on by The INO.com Team

The current macroeconomic environment has been less than kind to the housing sector. Demand was already reeling from decades-high inflation, and efforts to contain it have only ended up compounding the misery. In little over a year, the Federal Reserve approved its tenth interest-rate hike to take the Fed funds rate to a target range of 5%-5.25%.

With increasing borrowing costs, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) inched up to 6.91% by the end of May. With consumer debt surpassing $17 trillion during the first quarter of the year to hit a fresh all-time high, mortgage demand dropped to its lowest levels in three months and was accompanied by a decline in existing home sales.

Hence, it is unsurprising that between June 2022 and the end of the previous year, U.S. homeowners have lost $2.3 trillion since June, according to a new report from the real-estate brokerage Redfin.

With non-farm payrolls and private payrolls surpassing expectations to increase by 339,000 and 278,000, respectively, in May to signal persistent tightness in the labor market in a resilient economy, there are doubts about whether the Fed and major central banks around the world would be willing to pause or pivot their monetary stance.

While mortgage rates are expected to keep rising and weighing on the demand for available homes, there are between 1.5 million and 6 million fewer homes in the U.S. than there are households ready to occupy them, which is contributing to housing inflation and rent hikes. With the number of housing units per 1000 people declining over the past decade, the country is undeniably in the middle of surging homelessness.

As a result, the imperative to construct homes cheaper and faster despite labor shortages in construction jobs has been driving the fledgling but exponentially growing practice of 3-D printing them.

The technology, which dates back to the 1980s, uses computer-generated designs to create objects with a nozzle at the end of a robotic arm to extrude layer-upon layer of concrete or other materials like a soft-serve ice cream machine. In the case of 3-D printed homes, the pipe is attached to scaffolding and programmed to move in a specified shape.

3D printing uses recycled materials and uses only as much as is needed without trimming or subtracting excess materials. As a result, this additive manufacturing technique is more eco-friendly and cuts waste by 60%, thereby contributing to a circular economy without sending unused wood, concrete, or glass for window panes to landfills.

3-D printing promises to be an effective workaround to the ongoing labor shortage in the construction industry. While the machine is printing, it requires little supervision or staff on the site, which replaces on-site carpenters wielding hammers and nail guns, prevents injuries, and saves costs on workers’ compensation.

A 2018 study in the academic research publication IOP Science: Materials Science and Engineering, based in the U.K., argues that 3D printing can cut costs by at least 35%.

3-D printed homes are also suitable for effective protection against natural disasters, such as hurricanes, floods, and wildfires. In September 2022, the New York Times reported that a series of 3D-printed homes in Nacajuca, Mexico, have tolerated extreme conditions, including a 7.4-magnitude earthquake.
As a result, proponents see promise in 3D-printed homes providing homeless housing, accessory dwelling units, and rapid reconstruction in disaster zones, such as Ukraine.

Moreover, with the capability of producing complex shapes that can’t be otherwise produced during conventional construction, improvement in aesthetics and mass-customization make 3-D printed homes an architect’s delight. Although printing out a multi-story house is slightly more complicated, there are successful examples, including a 3D-printed apartment building in Germany.

Although the jury is still out on which system is comparatively superior, homebuilders use both on-site (which extrude recycled construction materials to build corduroy-patterned concrete walls right at the building site) and factory-based 3D printers to manufacture homes.

While builders in the United States have been experimenting with 3D printing for several years, a 100-house community in Georgetown, Texas, might someday be looked back on as the place which changed mass housing forever.

Lennar Corporation (LEN), the nation’s second-biggest homebuilder and construction technologies firm ICON, announced in November 2022 that they have begun construction on the 100-home Wolf Ranch development in Georgetown, Texas, with sales scheduled to begin on June 10.
According to the homebuilder's website, starting prices for three- and four-bedroom homes range from $476,000 to $566,000. Homes will range from 1,600 to 2,000 square feet.
According to ICON's CEO Jason Ballard, 3-D printed homes, whose construction costs are expected to keep declining with increasing scale, have “better design, higher strength, higher energy performance and comfort, and increased resiliency.”

If Chris Murphy, chief strategy officer for Oakland-based Mighty Buildings, is to be believed, “There is no way in 10 years we’ll be able to be building like we are today. Even if we didn’t have a massive shortage on the supply side, which we do, we don’t have the labor to continue building as we would want to today, and we have an environmental crisis.”

Given the potential of this technology, the increasing interest is evident from the fact the construction with 3D printers was one of several housing innovations on display during the Pacific Coast Builders Conference held last month in Anaheim.

Given the high growth rate and low penetration, the technology has a long runway ahead as it seeks to transform housing across the world and even beyond it, one layer at a time. Below are a few other stocks that could provide exposure to investors keen to make a long-term bet on this technology.

Stratasys, Ltd. (SSYS)

SSYS offers connected, polymer-based 3D printing systems, related services, consumables, and additive manufacturing (AM) solutions, mainly in Israel, the United States, Germany, Hong Kong, and Japan. The company’s offerings include 3D printers, materials, software, expert services, and on-demand parts production.

Amid unsolicited interests and advances from Nano Dimension Ltd. and 3D Systems Corporation (DDD), on May 25, SSYS announced its entry into a definitive agreement with Desktop Metal, Inc. (DM) whereby the companies will combine in an all-stock transaction valued at approximately $1.8 billion.
By combining the polymer strengths of SSYS with the complementary industrial mass production leadership of DM, the combined entity post-merger is expected to generate $1.1 billion in 2025 revenue, with significant upside potential in a total addressable market of more than $100 billion by 2032.

Proto Labs, Inc. (PRLB)

PRLB digitally manufactures custom prototypes and on-demand production parts, primarily from commercial-grade plastic, metal, and liquid silicone rubber. With a digital model that supports the transition from prototyping to production, the company can support developers and engineers effectively.

Materialise NV (MTLS)

Headquartered in Belgium, MTLS provides software and three-dimensional (3D) printing services. Through quality, reliability, and repeatability, which form the backbone of the 3D printing industry, the company serves and transforms businesses worldwide, including Colombia, Brazil, Australia, Malaysia, China, Japan, Austria, Poland, Germany, and France.

Is eBay (EBAY) the Hottest Buy Ahead of Its New Acquisition?

Posted on by The INO.com Team

Global commerce company eBay Inc. (EBAY) was founded in 1995 as an auction site. Since then, the company has grown into a major online marketplace for peer-to-peer sales operating in 190 markets globally, and has enabled $74 billion of gross merchandise volume in 2022.
Enhancing experience by utilizing the latest technology to empower sellers and buyers and building the trust of customers has been an integral part of the strategy of the online marketplace.

In 2020, EBAY launched its Authenticity Guarantee program, which draws on independent experts to vet and verify items sold on the platform. It was followed up with the debut of an authentication service for luxury handbags that allowed customers to get professional authentication for new and pre-owned handbags from luxury brands such as Saint Laurent, Gucci, and Balenciaga.

Even EBAY’s acquisitions reflect the platform’s unwavering focus on building trust while it increases its penetration in the fast-growing pre-loved segment to differentiate itself from numerous peers focusing on new and largely in-season goods.

As a result, after acquiring marketplace compliance solution 3PM Shield in February 2023 and used-sporting-goods marketplace, SidelineSwap earlier this month, on May 15, EBAY signed a definitive agreement to acquire Certilogo, a provider of AI-powered apparel and fashion goods digital IDs and authentication.

The acquisition is subject to the satisfaction of customary conditions, including regulatory approvals, and is expected to be closed in the third quarter.
Certilogo's platform uses digital technology to tag products with virtual IDs, or “product passports,” that enable traceability and protection against counterfeits. It empowers brands and designers to manage the lifecycle of their garments while providing consumers with a seamless way to confirm authenticity, access reliable information about branded items, and easily activate circular services.

According to Charis Marquez, VP of EBAY, "Certilogo's technology and talented team allows eBay to build on this commitment, establishing eBay as a leader in pre-loved fashion and offering new ways for consumers to connect and engage with brands."

Despite ten consecutive interest-rate hikes by the Federal Reserve in just over a year, the red-hot and decades-high inflation is yet to be sufficiently tamed. Amid the rising cost of living crisis, the appetite for second-hand goods has witnessed phenomenal growth, especially among young shoppers.
Moreover, with increasing awareness and emphasis on sustainable consumption, the stigma surrounding pre-owned goods has all but disappeared while community and circularity have been embraced.

Unsurprisingly, ThredUp’s annual Resale Report showed that the global pre-owned apparel market is set to double by 2027 to $351 billion -- 9 times the growth of the broader retail sector.

However, the concern of ending up with counterfeited goods has fueled the trust deficit and has emerged as a significant roadblock preventing greater adoption. The global market trading in fake goods is worth a staggering $4.5 trillion, with faux luxury merchandise accounting for up to 70 percent ($1.2 trillion), according to a 2019 Harvard Business Report.

Even Washington has expedited its crusade against dupes. It has also received legislative firepower through INFORM Consumers Act, which modernizes consumer protection laws and requires web marketplaces to collect and verify basic business information from sellers before they are permitted to sell online. Moreover, SHOP SAFE Act incentivizes platforms, such as EBAY, to follow best practices for screening and vetting vendors and the products they put up for sale, and forces them to address repeat-counterfeit-sellers.

Given the political emphasis on building and retaining consumer trust, the importance of Certilogo’s assumption can hardly be overstated.
This acquisition would also benefit EBAY’s ecosystem by offering fresh opportunities for small businesses to engage with consumers. By assuring their customers of the legitimacy and sustainability of their products, these businesses could be benefited by improving toplines, driven by repeat purchases from loyal customers.

Lastly, with EBAY’s earnings report last month showing increased traction in the luxury sector, with in-focus categories including watches, handbags, jewelry, and sneakers, its acquisition of Certilogo keeps it well-positioned to keep building momentum.

GameStop (GME) Stock Could Soar on June 7: Here’s What to Watch

Posted on by The INO.com Team

Video game retailer GameStop Corporation (GME), the signature meme stock, had previously been riding some short-term momentum. However, that has since leveled out, and the company has been making progress in right-sizing its business by slashing its inventory levels and reworking its cost structure.
Moreover, the company is undergoing a transitional period by halting its e-commerce efforts and focusing on its brick-and-mortar locations. Furthermore, GME makes changes to its rewards program. Also, GME stock might get a significant boost if there is a ban on short selling.

GME is expected to release its fiscal 2023 first-quarter report on June 7. The quarterly report should show reflect the drastic measures the company has been undertaking to achieve considerable profitability this year.

Let’s discuss the catalysts that could send GME’s stock price to fresh heights:

Favorable Fourth-Quarter Earnings

For the last fiscal year’s fourth quarter, the video game retailer posted its first quarterly profit in two years and surpassed analysts’ expectations for revenue. Its aggressive cost-cutting measures and strong demand for video game hardware in the holiday quarter helped the company become profitable.

For the quarter that ended January 28, 2023, GME reported a profit of $48.20 million, or $0.16 per share, compared to a loss of $147.50 million, or $0.49 a share a year earlier. Adjusted earnings of $1.16 a share beat analysts’ projections of a loss of $0.13 per share.

For the fourth quarter, the company’s net sales dropped slightly to $2.23 billion from $2.25 billion in the year-ago quarter. However, the figure was higher than analysts’ estimates of $2.18 billion.

The video game company had been working vigorously to steer itself back to profitability and partially got there by slashing its inventory levels and costs. Its selling, general, and administrative expenses were $453.40 million for the quarter, or 20.4% of sales, compared to $538.90 million, or 23.9% of sales, in the year-ago period.

Like many retailers, GME struggled with supply chain delays that left the company with a backlog of inventory after it previously tried to meet strong demand. Based on its fourth-quarter balance sheet, the company had $682.90 million in inventory, down from $915 million a year ago.
Furthermore, GME has been trying to improve its cash balance as a part of its revival strategy. The company’s cash and cash equivalents for the quarter were $1.39 billion.

“GameStop is a much healthier business today than it was at the start of 2021,” CEO Matt Furlong said on a call with analysts. “We have a path to full-year profitability.”

Shifted Focus from E-Commerce to Brick-And-Mortar Sales

Ryan Cohen took over GME in 2021, aiming to transform the struggling video game retailer into an e-commerce juggernaut. Unfortunately, the company’s e-commerce sales failed to take off. GME’s losses widened, and Cohen’s new online-sales executives resigned.
As a result, GME began cutting costs. The company canceled plans to build additional warehouses, closed a new e-commerce customer-service center, and laid off many corporate employees hired under the management of Cohen. Also, according to former GME executives and analysts, Cohen miscalculated what customers were prepared to pay through its website and app.

“Quarter after quarter we were unsuccessful with new ventures,” commented Ted Biribin, GME’s former employee. “If something didn't work, senior leadership would go onto something else very quickly.”

GME’s CEO, Matt Furlong, stated in an internal memo last year, “Our stores, in particular, are a differentiator that will help us maintain direct connectivity to customers and position us to have localized order fulfillment capabilities across more geographies. While we continue evolving our ecommerce and digital asset offerings, our store fleet will remain critical to GameStop’s value proposition.”

GameStop is poised for solid growth as the company has stopped focusing on e-commerce sales. Consequently, the company can now provide more support for its 4,400 brick-and-mortar stores. GME also introduced an initiative to motivate the company’s staff.

Last year, the company announced an “improved compensation” scheme for its brick-and-mortar video game store’s most senior employees. For Assistant Store Leaders and Senior Guest Advisers, the compensation comes as an undisclosed rise in their hourly pay. For Store Leaders, it comes in the form of $21,000 worth of GME stock (vested for three years) on top of their regular pay, coupled with “the opportunity to earn additional compensation every quarter by hitting goals for performance-based equity grants.”

GME’s focus on physical stores resulted in the company reporting a quarterly profit for the first time in two years. For the full fiscal year 2022, expenses were reduced by more than $100 million.

GME’s Membership Program Getting a Huge Makeover

GME offers incentives to members of its rewards program to secure customer loyalty. To that end, the company is seemingly making significant changes to its customer loyalty program. The existing PowerUp Rewards membership will have its name changed to GameStop Pro, with the price going up from $15 per year to $25.

GameStop Pro will access some special perks through this new program. Among other incentives, members will get bigger discounts on collectibles, pre-owned games, GameStop brand gear, clearance items, and more. GameStop Pro is expected to roll out on June 27, with existing memberships being phased out as they come up for renewal.

GME’s revised customer loyalty program could enhance profitability and growth for the company.

Prohibition on Short Selling Could Send GME To New Highs

The practice of short selling has come under increased scrutiny amid the recent banking turmoil. Short selling is a well-known strategy in which financial traders bet that the price of a stock will go down. Short sellers largely profited from the banking crisis by borrowing shares they expected to fall and repaying the loan for less later to pocket the difference.

In March 2023, Wachtell, Lipton, Rosen & Katz, a law firm known for representing large companies in mergers and against attacks from hedge funds, called on U.S. securities regulators to restrict short sales on financial institutions. Also, the calls from Capitol Hill and elsewhere to prohibit short-selling have gotten louder lately.

With more regulators and lawmakers ramping up their calls for an outright ban on short selling, investors should prepare for potential legal changes. As traders anticipate this possibility, GME stock could get squeezed higher quickly. The r/WallStreetBets crowd might start a massive short squeeze in anticipation of a potential short-selling ban.

How Should Investors Approach the Stock

The stock has risen 33.5% year-to-date, beating the 11.5% gain in the S&P 500 index. Moreover, shares of GME have gained 20.1% over the past month and 32.1% over the past three months.

As investors think the company can pull off a successful business turnaround, GME stock has risen recently. The video game retailer has essentially pivoted its focus to brick-and-mortar sales instead of e-commerce sales with an eye on improving profitability. The shift already resulted in its first quarterly profit in over two years.

Moreover, the revised customer loyalty program, GameStop Pro, is a smart move that could bolster the company’s top-line results in 2023. At the same time, a potential ban on short selling could prompt a massive final squeeze for GME stock. Now, all eyes are on GME’s first-quarter fiscal 2023 earnings, to be released on June 7, after the market close.

Over the past few years, stock traders and price chasers have targeted GME, but sensible investors should avoid emotional trades and monitor the company’s financial and operational progress.

Investors could also keep tabs on the buying activity of GME’s insiders. After all, if the company’s insiders express their confidence through share purchases, that is probably a positive sign for the stock. Director Larry Cheng recently purchased 5,000 shares of GME worth about $114,000. Following this purchase, Cheng now owns a total of 44,088 shares.

While many strong forces propel GME, investing in the stock still involves a high level of risk. Investors should continue to expect GME stock to remain volatile (with a 24-month beta of 1.90), and it is not appropriate to pour their entire account into this one stock.
Though it is advisable to take a small position in GME stock, as it may be on the cusp of a breakout, and the share price is likely to shoot higher in the near future.