Game on for GameStop

04/01/2016 7:00 am EST

Focus: STOCKS

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

It's been my decades-long experience the crowd is never right; the wise investor intentionally heads in the opposite direction, asserts contrarian expert Crista Huff, editor of Investing in Turbulent Times.

Among investors, the crowd is never right: they buy when they should sell, they cash in at market bottoms … you know the drill.

GameStop (GME) is a case where that crazy phenomenon has happened with a single stock. From the point of view of fundamental analysis, this stock is practically bulletproof.

At the same time, GME is the most shorted stock on Wall Street. Some 40% of the outstanding shares have been shorted (that means that gamblers are betting that the price will go down).

Why is this important to GME shareholders? Because as good news continues to emerge from GameStop -- the stock rises -- those short-sellers are losing more and more money.

They will have to repurchase the shares they shorted, in order to stem their losses and close out their short positions. All the buying activity from the short covering is going to push GME significantly higher.

GameStop is going through a multi-year phase of shifting its product mix in order to continue to grow and thrive.

Because video game sales are declining, the company is purposely increasing its sales of digital content, mobile and consumer electronics, action figures and collectibles -- all higher-margin businesses.

They just reported fourth-quarter 2016 results. For the full year, revenue rose to $9.36 billion, the third straight year of annual revenue growth.

Net income rose to $402.8 million, almost reaching its record net income of $406.8 million from 2011.

First-quarter 2017 results are expected to decline year-over-year, due to fewer major video game releases. We consider this a normal event for an entertainment stock.

GME is an extremely undervalued growth and income stock with a 4.9% dividend yield. The fiscal 2017 price/earnings ratio is very low at 7.6, and the firm is actively repurchasing stock.

I would buy this stock in a heartbeat, with expectations of making above-average capital gains this year. GME presents a tremendous total return opportunity for investors.

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By Crista Huff, Editor of Investing in Turbulent Times

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