The manager of 2021's top-performing hedge fund on his winning GameStop trade and lessons from it
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On this day last year, investors watched in amazement as GameStop shares surged to a record high of $347.51. The stock had skyrocketed amid a trading frenzy brought on by retail investors swapping stock tips — and related memes — on social media.
Professional investors also got in on the action but not all of them were on the short side of the trade. GameStop became Senvest Management's single best trade of all time, notching $700 million in profit for the firm. Those gains contributed to Senvest's more than 85% returns last year, making it the top performing hedge fund of 2021.
Senvest Founder & CEO Richard Mashaal sat down with CNBC's Delivering Alpha newsletter to discuss how he navigated his firm's position in GameStop and shared lessons he learned along the way.
(The below has been edited for length and clarity. See above for full video.)
Leslie Picker: You had been invested in GameStop for months prior to the frenzy that we saw in January 2021. Did you know what would happen?
Richard Mashaal: Surely we didn't know what would happen but you know, we did get in in September. So that was September , so well before the stock caught fire, and it's a classic contrarian play for us. There's one word that's synonymous with Senvest: it's contrarian. That's what we look for — things that are really out of favor that have the potential to come back into favor. And we saw that kind of setup there.
Picker: You were looking at the short interest as well, which I think was similar to some of the back and forth that we saw over the Reddit forums with the retail investors. How do you kind of look at those things when making a decision to invest in a company that has been out of favor? And kind of figuring out what catalysts could make it return to favor?
Mashaal: There's a couple of really easy indicators. So how many sells and buy recommendations. Wall Street doesn't issue very many sell recommendations and GameStop had plenty of those and very few, if not, no, buy recommendations. So that's a starting point. And then, of course, the short interest, which was over 100% of the shares outstanding, which is certainly the first time in my career — our fund's going on 25 years so it's quite a long time — that I've ever seen anything like that. So both of those would be pretty glaring indicators that this was a stock that was out of favor. Actually the high short interest concerned us a little bit, in a way, because that also meant it was a battleground stock and we don't usually like to get involved in a battleground stock and, boy, this really turned out to be a big battle.
So that's the negative side of it, but the positive side is, we saw management who had been there for over a year come in and do a hell of a lot of cost cutting, really reacted to the inability to operate their stores normally because of the pandemic and really push their foot to the pedal on e-commerce. So we saw some really good things happening there in terms of e-commerce, in terms of cost cutting, and just in general, repairing the balance sheet. They had debt, so really trying to raise cash. And so that sort of convinced us that the company had breathing room. And then another positive was the new console cycle. We were at the beginning of a new Xbox and Sony PlayStation console cycle. Those were going to be introduced in the November timeframe, so we were in September, so we thought that could be a driver of positive results, and with a higher revenue, lower costs, that would really have a positive effect on profitability.
And then, as well, you had an activist in the wings. And this was no regular activist, this was Ryan Cohen, Ryan Cohen had tremendous success founding Chewy, a pet food e-commerce company. And he did this in the face of severe competition from Amazon. So there was the thinking that this activist got involved in the management or on the board of GameStop, that he could then affect real positive change and help a transformation story.
Picker: So Ryan Cohen takes a board seat, he gets several others onto that board, and then the stock, from there, really kind of started to go haywire. What was that like for you? Take us into the offices of Senvest during that time period and the calculus of whether to hold or whether to sell when the stock started skyrocketing.
Mashaal: These things are certainly nerve wracking when they start happening and sort of start having a life of their own. I've always been aware of message boards and chatter about stocks, retail chatter about stocks, in general, obviously, never saw anything like this before, this is clearly unprecedented. So we definitely felt that once Ryan got on the board, that was a real catalyst for further upside. While we have short term and long term targets for stocks, with usually the short term being much, much lower, and really based on what could happen in the near term in terms of new sales of consoles, and the effect on their P&L, we felt that the long term and the transformation could lead to a much higher stock price. Now, when you're talking about a transformation story, I mean, any company can say they're going to have a transformation story, you need credibility. And that's what Ryan Cohen brought to the table. He brought credibility, he had done it before. And I think that's why the retail crowd and others really jumped on it.
Picker: But you didn't hold on, you did decide to sell throughout the frenzy. What were some of the key indicators to you that made you say, "Okay, it's time to take our gains and walk away from here."
Mashaal: When we saw what was going on, and it really was only the last week or two, we saw what was really recognized and fully appreciated, what was going on on Reddit and Wall Street Bets. We recognized it as a mania and once you recognize something as a mania, you sort of put aside the fundamental analysis you've done with spreadsheets about what the earnings possibilities are, what multiples should get. You recognize a mania and then you start to say, "Okay, well how do manias work?" Manias go extreme peak then peter out at some point and so what are we looking for? We're looking for peak momentum. And that was sort of the framework we were looking at how we were going to sell the stock.
We had different indicators. One of them was, you had a Chamath tweet, and that was an indicator that this thing could even go higher now that fellows, like, at the time, Chamath was the king of SPACs and SPACs are hot and he was speaking out. So clearly, people listened to him. And, obviously we felt it culminated with the Elon Musk tweet, that I believe came out on that Tuesday afternoon, where he just tweeted one word: [Gamestonk!!]. And you know, clearly Elon Musk is a person that people listen to, particularly retail investors, And he's someone who has done a transformation himself. He's also someone who happens to not have a very favorable view of short sellers. So his piling on with that tweet for us was, we all looked at each other and said, "How do you top that?" in terms of, what else is going to happen from a momentum point of view. And so for us that signified peak momentum and we proceeded to exit the rest of our position.
Picker: From a portfolio construction standpoint, I'm curious where your head is at with regard to short selling. Obviously, kind of bringing things back full circle to GameStop. There was the short squeeze element to it, which I know the SEC said wasn't as much of a part of the momentum upward as I think a lot of people made it out to be, but still a component of it. Are you currently hedging your portfolio with individual stocks indexes? What's your thoughts on the state of short selling right now?
Mashaal: Obviously, we are very attuned to short interest and those stocks that are heavily barred and try and stay away from those. We've kept our short positions in general smaller unless they're larger, more liquid stocks that we've got something on the long side of gains. So really, short squeezes have always been a risk and certainly they were a much bigger risk last year. But I think that this will be a good year for stock pickers to really differentiate themselves both on the long and short side. And again the indexes are still pretty close to the highs, even though they've had a bit of a correction here. So I think that does present opportunities to short some stocks that are overvalued, that perhaps won't meet lofty expectations. And at the same time, there are some really beaten down stocks trading at their 52 week lows and we're looking at those.
Picker: Lastly, are there any lessons that you learned from what happened with GameStop that you're now applying to your portfolio? I know you've been in the business for 25 years or so. But obviously, what we saw last year and how it impacted Senvest was remarkable. Is there anything that you kind of think back over the last year that you can kind of take away from that experience?
Mashaal: I think it's important to pay attention to the zeitgeist, of the moment, what's going on in the moment, and that can have an extremely powerful effect, as it did with GameStop. And narratives. We're fundamental investors and contrarian value investors, all those tags apply to us. But it's important to listen, to understand the narratives and what narratives are working in the market or not. And certainly for the last several years, the narratives of growth stocks and SaaS stocks, that was big, and you really couldn't fight that. Now those stocks have taken a bit of a tumble. So many of them are great companies, it's just a question of valuation. So really to listen to what's going on, and really, that's talking to people younger than me. So that's really, to pay attention and some of that can come by reading the message boards and seeing what the retail traders are saying. And it's great to see the [retail] traders come back. When I started my career, it was a lot about retail traders and then for the last several years you really didn't hear much about it, so it's good to see. I mean, definitely, the financial markets and the stock market, sometimes people treat it like a game. It's not a game. There's real money there and you make money and lose money. But you also do learn, you learn and I do believe in learning by doing. So, a lot of these retail investors are doing exactly that. And then you've got the apps like Robinhood, which really make it accessible so that's here to stay, I think. And whether it's stocks or crypto, young retail investors are very engaged.