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The Top Performing Hedge Fund Manager of 2021 on His GameStop Winning Exchange and the Lessons He Learned From It

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The Top Performing Hedge Fund Manager of 2021 on His GameStop Winning Exchange and the Lessons He Learned From It

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On this day last year, investors watched in amazement as GameStop shares hit an all-time high of $347.51. The stock had soared amid a trading frenzy sparked by retail investors trading stock advice – and related memes – on social media.

Professional investors also got in on the action, but not all were on the sell side of the deal. GameStop became Senvest Management’s best deal ever, recording a profit of $700 million for the company. These gains contributed to Senvest’s returns of more than 85% last year, making it the best performing hedge fund of 2021.

Senvest Founder and CEO Richard Mashaal sat down with CNBC’s Delivering Alpha newsletter to discuss how he navigated his company’s position in GameStop and shared the lessons he learned. learned along the way.

(The following has been edited for length and clarity. See above for the full video.)

Leslie Picker: You had been invested in GameStop for months before the frenzy we saw in January 2021. Did you know what would happen?

Richard Machaal: We sure didn’t know what was going to happen, but you know, we entered September. So it was in September [2020], so long before the stock caught fire, and it’s a classic contrarian game for us. There is a word that is synonymous with Senvest: it’s against the current. That’s what we’re looking for – things that really aren’t appreciated and have the potential to come back into favor. And we’ve seen that kind of setup there.

Picker: You were also looking at short-term interest, which I think was similar to some of the back and forth we saw on the Reddit forums with retail investors. How do you see these things when you make the decision to invest in a company that is no longer popular? And sort of figuring out what catalysts might bring him back into favor?

Mashaal: There are some really simple indicators. So how many sales and buy recommendations. Wall Street doesn’t give out a lot of sell recommendations and GameStop had a lot and very few, if any, buy recommendations. So that’s a starting point. And then, of course, the short-term interest, which was over 100% of the shares outstanding, which is certainly the first time in my career—our fund lasts 25 years, so that’s long enough—that I ‘ve never seen anything like it. So both of those would be pretty blatant indicators that this was a disgraced title. In fact, the high interest in the short term concerned us a bit, in a way, because that also meant that it was a battlefield stock and we generally don’t like to get involved in a field stock battle and, boy, did it turn out to be a big battle.

So that’s the negative side, but the positive side is we’ve seen management that’s been there for over a year come in and do a lot of cost cutting, really reacted to the inability to leverage their stores normally due to the pandemic and are really pushing the e-commerce pedal. So we’ve seen some really good things happen there in terms of e-commerce, in terms of cutting costs, and generally repairing the balance sheet. They were in debt, so they were really trying to raise money. And so that kind of convinced us that the company had some leeway. And then another bright spot was the new console cycle. We were at the start of a new cycle of Xbox and Sony PlayStation consoles. These were going to be introduced in November, so we were in September, so we thought that could be a driver of positive results, and with higher turnover, lower costs, it would really have a positive effect on the profitability.

And then, in addition, you had an activist behind the scenes. And it wasn’t a regular activist, it was Ryan Cohen, Ryan Cohen had huge success founding Chewy, an e-commerce pet food company. And it did so in the face of fierce competition from Amazon. So there was the thought that this activist got involved in the leadership or on the board of GameStop, that he could then bring about real positive change and help a story of transformation.

Picker: So Ryan Cohen takes a seat on the board, he puts several more on that board, and then the stock, from there, really started to go haywire. How was it for you? Take us to the Senvest offices during this time and the math of whether to hold or sell when the stock started to soar.

Mashaal: These things are certainly nerve-wracking when they start to happen and kind of start to have a life of their own. I’ve always been aware of message boards and stock chatter, stock detail chatter, in general, obviously I’ve never seen anything like this before, it’s clearly unprecedented. So we really felt that once Ryan got on the board, that was a real catalyst for further upside. Although we have short and long term targets for stocks, the short term is usually much, much lower, and really based on what might happen in the short term in terms of new console sales, and the effect on their P&L, we felt that the long term and the transformation could lead to a much higher share price. Now when you talk 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 already done that. And I think that’s why the retail crowd and others have really jumped on it.

Picker: But you didn’t hold on, you decided to sell all the way through the frenzy. What were some of the key indicators for you that made you say, “Okay, it’s time to take our gains and get out of here.”

Mashaal: When we saw what was happening, and it was really only for a week or two, we saw what was really recognized and fully appreciated, what was happening on Reddit and Wall Street Bets. We’ve recognized it as a fad and once you recognize something as a fad you kind of put aside the fundamental analysis that you’ve been doing with spreadsheets of the possibilities of gains, the multiples that should be obtained. You recognize a mania and then you start going, “Okay, how do manias work?” Crazes reach extreme heights then die out at some point and what are we looking for? We are looking for maximum momentum. And that was kind of the framework in which we looked at how we were going to sell the shares.

We had different indicators. One of them was, you had a Chamath tweet, and that was an indicator that this thing might even go higher now than guys, like, back then, Chamath was king of SPACs and SPACs are hot and he was talking. So clearly, people listened to him. And, obviously, we felt that culminated with Elon Musk’s tweet, which I believe came out this Tuesday afternoon, where he just tweeted one word: [Gamestonk!!]. And you know, it’s clear that Elon Musk is someone that people listen to, especially retail investors, and he’s someone who has made a transformation himself. He is also someone who does not have a very favorable view of short sellers. So his piling up with this tweet for us was, we all looked at each other and said, “How do you do better?” in terms of what else is going to happen from a momentum perspective. And so for us, that meant peak momentum and we proceeded to exit the rest of our position.

Picker: From a portfolio construction perspective, I’m curious where you stand on short selling. Obviously, sort of looping things back to GameStop. There was the short compression element, which I know according to the SEC wasn’t as much a part of the upside momentum as I think a lot of people have led you to believe, but was still a part of it. Do you currently hedge your portfolio with individual stock indices? What do you think of the current state of short selling?

Mashaal: Obviously, we are very attentive to short interest and strongly prohibited actions and we try to stay away from these. We have kept our short positions generally smaller unless it is larger, more liquid stocks where we have something on the long side of gains. So really, short cuts have always been a risk and they were definitely a much bigger risk last year. But I think it will be a good year for stock pickers to really differentiate themselves on both the long side and the short side. And again, the indices are still quite close to the highs, although they have undergone a slight correction here. So I think this presents opportunities to short some stocks that are overvalued, which may not meet high expectations. And at the same time, there are some really battered stocks trading at their 52-week lows and we’re looking at them.

Picker: Finally, are there any lessons you learned from what happened with GameStop that you now apply to your portfolio? I know you’ve been in the business for about 25 years. But obviously what we saw last year and its impact on Senvest was remarkable. Is there anything you think back to last year that you can take away from this experience?

Mashaal: I think it’s important to pay attention to the spirit of the moment, to what’s happening right now, and that can have an extremely powerful effect, as it did with GameStop. And stories. We are fundamental investors and contrarian value investors, all of these guidelines apply to us. But it’s important to listen, to understand the stories and what stories are working and not working in the market. And certainly over the last few years, the stories of growth stocks and SaaS stocks, that was big, and you really couldn’t fight that. Now those stocks have fallen slightly. Many of them are big companies, it’s just a matter of assessment. So really listening to what’s going on, and really, it’s talking to people younger than me. So it’s really, pay attention and some of that can come from reading message boards and seeing what retail traders are saying. And it’s great to see the [retail] traders return. When I started my career it was a lot of retail traders and then over the last few years you really haven’t heard much about it so that’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 out there and you make money and you lose money. But you also learn, you learn and I believe in learning by doing. So many of these retail investors are doing just that. And then you have the apps like Robinhood, which make it really accessible, so it’s here to stay, I think. And whether it’s stocks or crypto, young retail investors are highly engaged.

The Top Performing Hedge Fund Manager of 2021 on His GameStop Winning Exchange and the Lessons He Learned From It

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