The manager of the top-performing hedge fund of 2021 on his successful GameStop trade and the lessons learned from it

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On this day last year, investors watched in amazement as GameStop shares soared to a record high of $347.51. The stock had soared amid a trading frenzy sparked by retail investors exchanging stock picks — 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 best single deal ever, generating $700 million in profit for the company. Those gains contributed to Senvest’s returns of more than 85% over the past year, making it the best-performing hedge fund of 2021.

Richard Mashaal, founder and CEO of Senvest, sat down with CNBC’s Delivering Alpha newsletter to discuss how he’s managed his company’s position at GameStop and the lessons he’s learned along the way.

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

Leslie Picker: They had been invested in GameStop for months prior to the frenzy we witnessed in January 2021. Did you know what would happen?

Richard Mashal: Of course we didn’t know what was going to happen, but you know, we got in in September. So that was September [2020], well before the stock caught fire, and it’s a classic contrarian play for us. There is a word synonymous with Senvest: it is contrary. That’s what we’re looking for – things that have really fallen out of favor, that have the potential to come back into fashion. And we saw that kind of setup there.

Picker: They also looked at the short-term interest, which I think was similar to the back-and-forth we’ve seen on the Reddit forums with retail investors. How do you view these things when making a decision to invest in a company that has fallen out of favor? And find out what catalysts could make it popular again?

Mashaal: There are a couple of really simple indicators. So how many sell and buy recommendations. Wall Street doesn’t issue very many sell ratings, and GameStop has had a lot of them and very few, if not, buy ratings. So that’s a starting point. And then of course the short-term rates, which were over 100% of shares outstanding, which is certainly the first time in my career — our fund has been around for 25 years, so it’s quite a long time — that I’ve even seen anything like that. So both would be pretty glaring indicators that this was a stock that’s fallen out of favor. In fact, in a way, the high short interest worried us a little because that also meant it was a battlefield stock, and we don’t usually like to own a battlefield stock, and boy did that turn out to be a really big battle.

So that’s the negative side of that, but the positive side is that we’ve seen management, who’s been there for over a year, come in and do a lot of cost cutting, really responding to the inability to run their businesses normally Pandemic and are really stepping on the gas with e-commerce. So we’ve seen some really good things happen there in terms of e-commerce, in terms of cost cutting, and generally in terms of repairing the balance sheet. They were in debt, so they were really trying to raise money. And that kind of convinced us that the company had room to breathe. Another positive aspect was the new console cycle. We were at the beginning of a new Xbox and Sony PlayStation console cycle. These were supposed to be rolling out in November so we were in September so we thought that could be a driver for positive results and with higher sales and lower costs that would be really positive for profitability.

And then you also had an activist waiting in the wings. And this wasn’t your average activist, this was Ryan Cohen, Ryan Cohen had tremendous success starting Chewy, an e-commerce pet food company. And he did so in the face of stiff competition from Amazon. There was a thought that if this activist got involved in the management or the Board of Directors of GameStop, then they could really make positive change and help a transformational story.

Picker: So Ryan Cohen takes a seat on the board, he brings several others onto that board, and that’s where the stock really started to go haywire. How was that for you? Take us inside the Senvest offices during this time and the calculus of whether to hold or sell as the stock soared.

Mashaal: These things are certainly nerve wracking when they start happening and taking on a life of their own. I’ve always been aware of message boards and chatter about stocks, retail chatter about stocks in general, obviously I’ve never seen anything like this before, it’s clearly unprecedented. So we definitely felt that this was a real catalyst for further upside once Ryan joined the board. While we have short term and long term targets for stocks, with the short term ones usually being much, much lower and really based on what could happen near term in terms of new console sales and the impact on their P&L, we have felt that the long-term and the transformation could result in a much higher share price. Well, if you’re talking about a transformation story, I mean any company can say it’s 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 that before. And I think that’s why retailers and others have really jumped at it.

Picker: But you didn’t persevere, you decided to sell through all the frenzy. For you, what were some of the key indicators that made you say, “Okay, it’s time to take our achievements and move on from here.”

Mashaal: When we saw what was going on, and it really was only in the last week or two, we saw what was really acknowledged and fully appreciated what was going on at Reddit and Wall Street Bets. We recognized it as a mania, and once you recognize something as a mania, put aside the fundamental analysis you’ve done with spreadsheets, what the earnings opportunities are, what multipliers should get. You recognize mania and then you start saying, “Okay, well, how does mania work?” Manias reach an extreme peak and then eventually subside, so what are we looking for? We look for peak momentum. And that was sort of the framework that we looked at for how we would 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 go even higher now that dudes, like at the time, chamath was the king of SPACs and SPACs are hot and he spoke up. So clearly that people listened to him. And obviously we felt it culminated with the tweet from Elon Musk, which I believe came out this Tuesday afternoon where he just tweeted one word: [Gamestonk!!]. And you know, Elon Musk is clearly a person that people are listening to, especially retail investors, and he’s someone who has undergone a transformation himself. He’s also someone who doesn’t exactly like short sellers. So he piled into this tweet for us, we all looked at each other and said, “How can you top that?” in terms of what’s yet to happen from a momentum perspective. So for us this represented peak momentum and we proceeded to exit the rest of our position.

Picker: From a portfolio construction perspective, I’m curious to see where you stand on short selling. Apparently it comes full circle with GameStop. There was the short squeeze element, which I know the SEC said wasn’t as much a part of the upside momentum as I think many people were claiming, but was still a component of it. Are you currently hedging your portfolio with individual stock indices? What are your thoughts on the state of short selling right now?

Mashaal: Obviously we are very tuned into and trying to stay away from short-term interest rates and heavily restricted stocks. We have generally kept our short positions smaller, except in larger, more liquid stocks where we have something on the long side of gains. So short squeezes have always been a risk and certainly they were a much bigger risk last year. But I think this will be a good year for stockpickers to really differentiate themselves on both the long and short sides. And again, the indices are still pretty close to the highs, although they have had a slight correction here. So I think this presents opportunities to short some overvalued stocks that may not live up to high expectations. And at the same time, there are some really down stocks trading at their 52-week lows, and we’re looking at those.

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

Mashaal: I think it’s important to pay attention to the zeitgeist, to the moment, what’s happening, and that can have an extremely powerful effect, as was the case with GameStop. And stories. We are fundamental investors and contrarian value investors, all of these tags apply to us. But it’s important to listen, understand the narratives, and understand which narratives are or aren’t working in the marketplace. And certainly the narratives of growth stocks and SaaS stocks have been big in recent years, and there really was no fighting that. Now these stocks have taken a bit of a tumble. So many of them are great companies, it’s just a matter of judgment. So really listening to what’s going on, and really, that’s talking to people younger than me. So that’s really something to look out for, and some of that can come from reading the message boards and seeing what the retailers are saying. And it’s great to see that [retail] Traders come back. When I started my career it was a lot about retailers and in the last couple of years you really haven’t heard 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 is real money there and you make money and lose money. But you also learn, you learn and I believe in learning by doing. So a lot of these retail investors are doing just that. And then there are apps like Robinhood that make it really accessible, so I think that’s going to stay here. And whether it’s stocks or crypto, young private investors are very engaged.