Bireme Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be seen here. A portfolio net return of 9.1% was delivered by the fund for the third quarter of 2021, handily eclipsing the S&P 500’s return of 0.6%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Bireme Capital, in its Q3 2021 investor letter, mentioned GameStop Corp. (NYSE: GME) and discussed its stance on the firm. GameStop Corp. is a Grapevine, Texas-based electronics retail company with a $15.3 billion market capitalization. GME delivered a 962.05% return since the beginning of the year, while its 12-month returns are up by 1,761.30%. The stock closed at $200.09 per share on November 1, 2021.
Here is what Bireme Capital has to say about GameStop Corp. in its Q3 2021 investor letter:
“Remarkably, Reddit traders have initiated not one but two stratospheric climbs in the GME share price since the start of the year.
In January, the shares reached $300, up from $10 last October. This surge entered the national conversation as almost no other stock run in history, prompting both a Congressional investigation and a mention on Saturday Night Live. Short interest collapsed from 71m shares to 10m shares and eventually the share price did too, settling at $50 by the end of February. What’s more impressive is that the Reddit crowd has fueled a second rise in GME, with shares now trading at over $170.
Gamestop (GME) has no realistic chance of meeting the expectations implied by these prices.
Gamestop’s current market capitalization is about $13.5b. This means that one day the firm will likely need to earn >$500m in profits (implying a ~4% earnings yield) to generate a positive return. But Gamestop has never earned $500m in a single year. The company’s peak profitability was way back in 2016 when it netted $415m. Profits have been declining ever since, including massive operating losses of $400m in 2019 and $238m in 2020. Revenues have declined precipitously as well, from $8.3b in 2018, to $6.5b in 2019, to just $5.1b in 2020.”
Photo by Tech Daily on Unsplash
Based on our calculations, GameStop Corp. (NYSE: GME) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GME was in 18 hedge fund portfolios at the end of the first half of 2021, compared to 13 funds in the previous quarter. GameStop Corp. (NYSE: GME) delivered a 26.92% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
