Two Small-Time Investors Were Buying GameStop Stock Before It Was Cool

They won, and then things got wild. Shares have zoomed from $4 all the way to above $400 and back to $90. John Broderick’s Permit Capital has made more than $100 million, and Kurt Wolf’s Hestia Capital is up around $50 million, at least in paper gains, according to regulatory filings. The duo risked their reputations on the future of GameStop and in doing so helped plant the seeds that turned into a stock rally that has captivated Wall Street.

“It’s sort of like after the Super Bowl when they ask someone how it feels and they say it doesn’t feel real,” said Mr. Broderick. “I guess I can go to Disney World.”

Their realized profits aren’t quite equal to each other’s right now, their stock-picking fairy tale colliding with the reality of corporate bylaws.

Mr. Broderick has been able to cash out much of his stake and book career-changing gains. Mr. Wolf, though, is now a director at the company, and board rules restrict his selling. He sold a piece at a big profit, but most of his potential gains are on paper, at the mercy of the rally’s coming months. Just Tuesday, more than half of his gains disappeared.

A representative said Mr. Wolf declined to comment. GameStop hasn’t commented on the trading.

The spark for GameStop’s rally has been credited to

Ryan Cohen,

who co-founded online pet-supplies retailer

Chewy Inc.

CHWY 0.32%

His bet, disclosed in August, gave investors a reason to believe that someone was about to transform GameStop into an internet retailer. In November, Mr. Cohen sent a letter to the board urging just that kind of pivot, and asking for board seats.

When Mr. Cohen got a board seat in January, it created another sea change. A crowd of amateur stock pickers on Reddit believed in him and began buying shares in waves. That nearly sunk hedge funds that had been betting against GameStop in dangerously concentrated amounts. The result: Shares soared from some $18 to $325—an increase of more than 1,700%—in three weeks. They touched $483 in intraday trading last week. They fell sharply Tuesday, closing at $90.

But the path for Mr. Cohen’s success was laid by Messrs. Broderick and Wolf, who were making an argument for value in GameStop long before it was cool. “We believe the fair value of the Company is at least $19 per share,” they wrote last year when the stock was around $4.

They are far from Wall Street giants.

Mr. Wolf, 47 years old, started Hestia Capital in 2009 after working at hedge funds and co-founding a health-care startup. He first bought GameStop in 2012. His firm is so small it doesn’t have to file the quarterly disclosures required of those that manage over $100 million in outside money. At its peak, Hestia had spent just under $7 million to buy about 2.1% of GameStop, according to filings.

Mr. Broderick, 51, manages Permit Capital, based in West Conshohocken, Pa., outside Philadelphia. It is part of a broader financial group started by former Morgan Stanley executive Richard Worley and onetime FAO Schwarz chairman Peter Morse. The fund is named after a particularly hard-to-catch fish.

Permit Capital managed about $287 million as of December. Mr. Broderick first bought GameStop stock in 2011. At its peak, Permit had spent about $35 million on a 5.5% stake, making it one of the biggest holders, according to filings.

By any normal standards of corporate activity, GameStop has already been through a hectic few years. The company has changed strategies and CEOs, run a failed process to sell itself, and had multiple investors suggesting ways it could do better.

At the start of 2019, Mr. Wolf sent a public letter to the board urging a massive repurchase of shares. When the company only partly agreed, he publicly called for board changes.

After seeing the letter, Mr. Broderick reached out to Mr. Wolf and they formed a team. A few days later, GameStop agreed to add two new directors.

The peace didn’t hold. On March 12, 2020, Messrs. Wolf and Broderick demanded two more seats, including one for Mr. Wolf.

This time, the company stood fast, arguing it had a strategy in place and had changed its board enough.

To win a board fight, an investor needs to canvass shareholders and lobby them for votes. This one, they had to do amid a pandemic. Messrs. Wolf and Broderick weren’t deterred.

To pay for the fight, Mr. Broderick said, he and Mr. Wolf racked up their personal credit cards and Permit borrowed to buy more stock on margin. Mr. Broderick had a new baby but seemed locked in his office. Mr. Wolf is raising five kids and some chickens outside Pittsburgh.

Mr. Broderick said he questioned whether the effort was worth it at times but that Mr. Wolf’s excitement never waned.

“I call him the Monitor, as in the lizard,” Mr. Broderick said. “He pursued this thing with incredible focus and with this intense energy every day.”

Messrs. Wolf and Broderick argued that board members had squandered the shareholders’ money and urged them again to buy back stock. They said the board was wasting the asset of an enviable set of loyal customers that a booming game industry needs to connect with.

In June, shareholders elected Mr. Wolf and the other nominee to the board.

Mr. Cohen announced his investment a few weeks later.

GameStop’s fiscal quarter ended Saturday. Its board rules say directors cannot sell during a blackout period that starts seven days before the end of the quarter—in other words, starting the week when GameStop shares soared 400%. The blackout period lasts until the day after the company discloses the results, typically the middle of March.

Shortly after Mr. Cohen joined the board, Mr. Wolf’s Hestia sold several chunks of stock at prices around $20 and $30 a share, for a total of about $17 million, according to filings. That was already a significant return on the original investment, and left Hestia with 431,000 shares.

By the end of that week, board members were barred from selling more, just as the trading entered a new stratosphere.

Last week, Mr. Wolf watched his position rise to a value of $210 million and fall back to $80 million. At the close of Tuesday, it was around $40 million.

Mr. Broderick declined to say how much Permit has sold but that he significantly scaled back his investment as the price became untethered from fundamentals.

As of the end of the year, Permit had already sold about 2 million shares, according to filings. That would have brought in an estimated $21.5 million, based on closing prices. The firm still held 1.23 million shares, which, if sold at last month’s average closing price, would have been another $100 million in proceeds.

While he still believes in GameStop’s future, and thinks Messrs. Wolf and Cohen can turn it into an internet retailer, Mr. Broderick doesn’t believe the stock is worth $300 a share. But he also no longer believes the $19 he and Mr. Wolf pitched last year is high enough.

“This,” Mr. Broderick said, “has been the single craziest week of my life.”

Write to David Benoit at david.benoit@wsj.com