Mad Money

Short squeeze or short story: A Cramer conundrum

GameStop CEO: $730 million digital sales in 2013
GameStop CEO: $730 million digital sales in 2013

(Click for video linked to a searchable transcript of this Mad Money segment)

When a stock with significant short interest encounters positive developments, it can race higher, faster than even the highest octane driving game.

And Cramer says GameStop, the video game seller, has the potential to be one of those stocks that surges as shorts race to cover. But with that kind of reward comes significant risk.

First the bull case:

"There are a ton of people betting against GameStop; 31 percent of GameStop's shares have been sold short," Cramer said. "If the shorts are wrong (about the direction of this stock), that could be like rocket-fuel sending the stock much higher."

Jon Feingersh | Stone | Getty Images

That is, a positive catalyst could trigger aggressive short covering as bears cover their negative bets.

And Cramer said there is a very positive catalyst on the horizon. "The industry is on the edge of a new videogame cycle, and historically, that's been very bullish for GameStop." It can really boost the bottom line.

That would seem like a compelling argument to buy ahead of a short-covering rally.

But here's the rub. The bearish case is equally compelling.

You see, there's a growing belief among skeptics that GameStop's business model is becoming obsolete, with fewer and fewer customers actually going to a videogame store to buy games. Bears say

"We now live in a world where videogames can simply be downloaded off the Internet," Cramer noted. "It's true that GameStop has rolled out its own digital distribution business, but they're just one competitor among many. That doesn't really defuse the potential threat to the company's old fashioned bricks and mortar business."

The new videogame cycle could usher in a sea-change, in which many more games are purchased online.

If that's the case, then bears could prevail and send shares tumbling lower, faster than a race car that's skidded off the track.

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Cramer said those kinds of powerful catalysts have made GameStop a controversial stock to own.

It could roar as the release of new games drives business and sends shorts into a panic. But it could get poleaxed if developments show many more people have stopped buying games and instead started downloading them.

"I think this is a real conundrum," said Cramer. "If you want to take a flier do the homework. Make sure you understand these catalysts."

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