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Business

GameStop falls 25% on potential share sale, other ‘meme stocks’ falter

(Reuters) -Shares of GameStop Corp fell 25% on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of stocks favored by retail investors on social media platforms.

GameStop shares recently traded at around $226, after the video game retailer on Wednesday reported stronger-than-expected earnings, named the former head of Amazon.com Inc’s Australian business as its chief executive officer, and said it may sell new shares.

Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.

Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 13%, burger chain Wendy’s down 4% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down 18%after surging more than 38% on Wednesday. AMC shares were off around 13%.

Worries that other companies that have experienced big run-ups in their stock prices could follow GameStop and AMC in announcing share offerings may be rippling out to the broader meme stock universe, said Jack Ablin, Chief Investment Officer at Cresset Capital.

GameStop on Wednesday said it could sell up to 5 million new shares, while AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.

“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run up,” Ablin said. “Investors are taking a dim view of that strategy.”

Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.

The rally in heavily-shorted U.S. stocks, which has also lifted shares of Medicare-backed insurance seller Clover and AMC, has drawn the attention of the U.S. Securities and Exchange Commission (SEC).

GameStop said on Wednesday the SEC had requested documents and information related to an investigation into that trading. The company’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.

In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday. That matched their peak in January, when the surge in GameStop shares squeezed short sellers and further boosted the stock price.

(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)

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