Cramer suggests traders take profits after engineering 'beautiful' short squeeze in GameStop

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CNBC’s Jim Cramer on Monday implored investors who rode the Reddit-sparked wave in GameStop stock to take profits and sell shares of the video-game retailer.

“What worries me here is that a bunch of people have bought GameStop in the past week, and they’re now being told to hold the line,” the “Mad Money” host said. “But if you hold the line, you’ll end up holding the bag when everyone else does ring the register.”

Shares of GameStop lost nearly a third of their value Monday, plunging 30.8% to $225 apiece after they rallied 400% last week. For the month of January, GameStop’s stock advanced 1,625% amid an epic short squeeze orchestrated by retail traders who used forums like Reddit’s WallStreetBets.

Short selling is a strategy in which an investor borrows shares of a company and then promptly sells them, with the expectation the price will fall in the future. The short seller buys back the stock at its lower price and returns the borrowed shares, profiting off the difference.

When the opposite happens, like when online traders poured into GameStop, hedge funds and other investors who had shorted the stock may try minimizing their losses by purchasing shares at the current higher price. Both groups of investors buying the stock adds to the upward momentum.

The investment thesis hatched on WallStreetBets has undoubtedly proven correct, Cramer stressed. They recognized that the more than 100% short interest in GameStop made it particularly vulnerable to a massive squeeze if enough people piled into the stock and drove its price higher.

“Sure enough, they were just right. That was beautiful. The trade worked,” Cramer said. “If you bought GameStop a week ago, you’ve got an enormous gain right now, at least on paper.”

The stock closed at $76.79 per share Jan. 25, so Monday’s closing price represents a gain of more than 190%.

“If you actually want to keep those winnings, you need to declare victory and you need to ring the register …on at least part of your position,” Cramer said. “Don’t worry, your selling alone won’t send it spiraling down. It won’t. You’re just laughing your way to the bank.”

GameStop store

Scott Mlyn | CNBC

Cramer said he is not trying to protect hedge funds and other professional money managers who may have been on the wrong side of the trade. “They can protect themselves,” he said. Instead, Cramer said he is simply leaning on advice he often espouses to “Mad Money” viewers: “The gains don’t count until you sold some.”

Although GameStop had faced declining revenues in recent years as some video-game players turn to digital downloads, Cramer said he acknowledges the company could be turned around.

Indeed, news that Chewy co-founder Ryan Cohen had joined GameStop’s board of directors helped send the stock higher in early January. Some are optimistic that Cohen’s e-commerce expertise could help GameStop deftly navigate a digital transformation.

“Could GameStop do something dramatic to justify … a $50 [per share price]? How about $60? How about $70? Well, it’s possible,” Cramer said. He suggested they could sell additional stock and use it to “get into a better line of business,” such as the game-developing space. The company could also fix up its balance sheet and possibly convert stores into fulfillment centers as part of a big e-commerce bet, he added.

“E-sports has gotten huge. Maybe they could turn those stores into arcades, like gaming palaces,” Cramer also suggested. “I am sure [Cohen] has thought about these things, but, at best, these plans merely take GameStop back to $50 or $60,” which is closer to where it traded back in 2013.

“I’m begging you, please don’t be greedy,” Cramer added. “The short squeeze trade is over and without another short squeeze — which maybe somebody is going to try to manufacture, but the short squeeze position is down — it’s hard to justify paying more than $60 for GameStop even if you’re feeling incredibly bullish.”