It was September 29 when I last wrote about GameStop (GME) in Chasing Value: Are GameStop's Days Numbered? At that time I strongly believed "The demise of GameStop is not imminent -- but it's inevitable." My opinion of this outlet for new and used video games has indeed changed since that time.
I now believe even more fervently that GameStop the gamer is a goner. If you own it, you are playing a game of chicken to see if you make a few bucks with GME as it bounces up and down before it sinks. A word of caution is in order: timing the market as a strategy is a losing proposition the majority of the time.
My colleague Steven Mallas has been following the saga too (see GameStop: Buy or Sell After Latest Report?). He is a little less harsh than me, but draws some similar conclusions.
In September short interest stood at 28.82 million shares of the 150.35 million shares outstanding. That is 19.17% of the stock. Since then short interest has increased to 34.74 million shares with 151.39 million shares outstanding, or 22.95% of the available stock -- that is a lot!
To be fair, GameStop is growing, buying back shares, and the metrics, aside from the short interest, look very good. The trailing P/E is 9.01 and the forward P/E looks to be heading down at 7.82. The price-to-earnings-to-growth (PEG) figure of 0.83 is also good, indicating the pace of growth exceeds what you are paying for that growth. The company also has a very little debt, to go with a double-digit return on equity of 14.94%.
The wonderful numbers just keep on coming with a low price to cash flow of 5.77, a low price to sales of 0.41 and a low price to book of 1.14. This has all the appearances of an amazing value, except for one thing, insiders have all been selling and they have been doing so all year long. This seems strange doesn't it?
If I were a shareholder I would wonder what is going on. Here is the scoop. What if all of the company's stock buybacks are being initiated only to prop up the stock price, thus allowing the insiders to sell options in the money. This means the stock buybacks are actually just an illusion because the directors are transferring shareholder money into their escape money. If they believed the future of the company was so bright they would be increasing their positions, not decreasing them. Is there any other explanation for why the company is buying when the directors are selling?
In my previous post I included a reader poll. Let's ask the question again.
|Yes, it has long-term viability.||58 (41.7%)|
|No, it's gone in 2 to 4 years.||37 (26.6%)|
|No, but it might last 4 years or more.||44 (31.7%)|
Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money.and is on twitter: ChasingValue Disclosure: He does not own shares and/or options of GME.