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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. | |
|---|---|
| No, it's gone in 2 to 4 years. | |
| No, but it might last 4 years or more. |
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.
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Reader Comments (Page 1 of 1)
12-27-2010 @ 2:13PM
ashokkali said...
I think this is what I call as ignorant analysis. When gamestop is digitizing itself and moving into the new direction with strategic investments in digital world like purchase of Kongregate and releasing games on ipad, I believe analysts like you are writing dumb analysis makes common investors nervous and walk away. You should be educating them on how the strategy at GameStop is changing by analyzing end-t0-end and mentioning that Value is there, but GameStop is trying to adopt to the challenges. There is certainly risk, but Mgmt recognizes this and trying to position the company. There is uncertainity. If the new strategy works out then it is gold otherwise very risk.
I don't see that kind of analysis and you call yourself a new age reporter/analyst by blogging your thoughts that are ignorant and not even half baked.
12-27-2010 @ 3:07PM
Sheldon L said...
Ash,
Thank you for taking the time to comment.
Readers should take full advantage of your comments and your analysis -- not....and they will learn why I say the company is toast.
1) The new strategy is simply an attempt to come to grips with a changing market environment, one in which the current strategy and market will fade. It is managements recognition of my points that has lead them to this.
2) The new strategy, if online, will not produce any used games, and thus takes away one of the market advantages that some readers / investors have highlighted as important.
3) You yourself speak mostly of risk, uncertainty, and very high risk!
"There is certainly risk, but Mgmt recognizes this and trying to position the company. There is uncertainiy. If the new strategy works out then it is gold otherwise very risk."
4) GameStop has a strong niche in the bricks and mortar world, and is ahead of the competition. They have no such advantage and are in fact behind, a long way behind, many competitors in the online world, and there are fewer barriers to entry.