Last month I covered some turnaround stories heading into the second half of 2018. One of them is already up some 70%+ since ($VSI). Another 35% ($OLED). The stock I want to cover again is only up a few percent since last month. However I think there is a lot more upside coming in the months ahead.Gamestop earlier this year, after reporting earnings, fell to a fresh 6 year low, which also happens to be a 12+ year support level for the stock.
This area of support has acted as a springboard for price action the last 12 years. The last two tests of this price level resulted in 300%+ gains for the stock. I have no idea what lies ahead for Gamestop's stock price. It could go to zero. It could go to $100. However I entered calls last month and will likely enter more this coming week because I think the stock is setting up for another sharp rally. 300%? 200%? 100%? A move to $20 - $22 over the coming months is what I envisioned when I started buying calls last month.
If you want a detailed breakdown of Gamestops financials, etc. Seekingalpha has many well authored articles on the stock. Here is one of the latest articles. It is a great and thorough read if you have the time. I'm not going to spend a lot of time breaking down Gamestops SEC filings. The articles at SeekingAlpha have done it at least as well as I could have. However I will say, I think a lot of the downside for Gamestop is more perception than reality. Reality is the company is doing as well as could be expected considering the shift to digital gaming. I'd even say better than expected. Blockbuster would have already been bankrupt. And that is why I think the Blockbuster 2.0 scenario that the bears have hung their hats on, is not going to happen.
So why is Gamestop trading near 6 and 12 year lows?
The most recent move to the downside was due to a decline is same store sales. SSS were down 5.3%. However those sales were compared against a quarter where the Nintendo Switch debuted. Also Gamestops sales are not stable throughout the year. 30-35% of their sales come around the holiday season. Despite this SSS decline the company reiterated their guidance for the year. They expect FY18 EPS 3.00- $3.35, consensus $3.11.
With Gamestop trading at around $15 - $15.50 a share a $3 EPS for 2018 would imply a forward p/e ratio of 5! Best Buy gets a 15 forward p/e ratio. Bed Bath and Beyond with its 45% drop in earnings gets a 9 forward p/e. Gamestop... a 5.... Gamestop and its 10% dividend yield! In contrast Best Buy has a 2% yield and Bed Bath and Beyond a 3% yield. A very reasonable 9 forward p/e gets you a $27 $GME a 10 forward p/e a $30.00 and a Best Buy'eqsue 15 forward p/e gets you a $45 stock
When Gamestop was a $45 stock in 2013 it had 20% MORE outstanding shares, LESS sales, and LESS gross profit than it did this past year!
Let's look quick at that last five years for Gamestop. A rather nasty decline. The shorts were betting on downside and they clearly got it.
The stock has fallen from $45 a share to $15 a share! Over that same time the outstanding share count has dropped from almost 120 MILLION shares to just over 100 MILLION shares through share buybacks.
Revenue has gone UP!
Almost $90 a share in revenue!
Same store sales have been UP 4 of the last 5 years. The dividend yield is UP over 10%!
Clearly Gamestop is not a growth stock. However if you looked at a five year stock chart for the company you would think their revenue had fallen off a cliff. That they were hemorrhaging cash. That they are struggling to fund their operations. It's quite the contrary. Gamestop has been issuing a dividend since the lows in 2012. Recent charges have hit their headline numbers giving the bears the illusion of validity to their Blockbuster 2.0 dreams. Volatility in Gamestops sales has made their recent earnings reports look rather bleak. Negative headlines are a boon to the massive short position that has been building the last few years.
Is it any coincidence that despite steady and strong earnings the one thing that has correlated with Gamestops stock falling has been the the steady rise the short interest of the stock? Coincidence.......?
At the middle of July the short interest was some 50% of the float. Over 46 MILLION shares out of just 101 million outstanding has been borrowed and sold short. That is well over $600+ MILLION of additional SELLING pressure that the stock has endured over the last few years. You could almost say, how couldn't the stock drop when 50% more shares, that had no intention of being sold, are hitting the bid on a daily basis. One negative same store sales print only emboldened the shorts, as they continued to increase their position.
However shorting a stock with a 10% dividend yield comes at a cost. The short seller is responsible for the dividend, in this case ~$1.50 a share per year. With the stock at $45 or $40 or $30, and the price action moving south, that $1.50 is not a concern. However, as the stock has bottomed recently and turned around off 12+ year support, the dividend yield is more of an issue. Also those looking at the financials and not playing the Blockbuster 2.0 card realize the dividend is likely not going away any time soon. Perhaps even, pray tell , a divi raise?
So this evening, while doing some research, I found the just released updated short data and discovered over 12% of the massive 46 MILLION share short position has been covered in the second half of July. Short interest is now just over 40% of the outstanding shares from 46% less than a month ago. The Shorts are starting to cover.
I think a lot of the downside the last two years was from an ever increasing short position in the stock. To see the shorts starting to cover is a positive sign for the stock. I think the bottom was put in a few months ago. I think in a worse case scenario Gamestop is going to be just a stable business with a steady dividend in the years ahead. If they can continue to grow collectibles, comics, their web presence, V.R., and evolve, perhaps the record highs of years past will get eclipsed again. For now the bear thesis and massive short selling has led to what I think is a great opportunity for upside. I am in calls and will likely add more in the weeks ahead.
I think this could be a $20-$22 stock over the next few months.... and I haven't even talked about the possibility of a buyout.