GameStop: For Traders and Investors

09/19/2016 8:00 am EST


Crista Huff

Editor, Cabot Undervalued Stocks Advisor

This recommended stock — a video game & consumer electronics retailer — recently got caught up in the widespread retail stock rout, notes Crista Huff, editor of Cabot Undervalued Stock Advisor.

GameStop (GME) remains quite undervalued, with a huge 5.1% dividend yield, and a very low 2015 long-term debt-to-capitalization ratio of 14.4%.

Even though earnings growth is expected to be slow for a while, gross margins and full-year earnings are reaching record levels.

The Bad News: Declines in hardware and software were larger than expected, leading to total sales down 7.4% for the quarter.

Weakness in hardware and software come from a combination of an industry trend away from sales of physical gaming products, compounded by a lack of new game releases during the quarter.

The Good News: GameStop has been successfully diversifying into higher margin businesses ... a trend that is fully expected to continue, leading to annually increasing profits.

GameStop achieved a 37.9% gross margin rate in the quarter--the highest in its history. GameStop acquired another 507 AT&T retail stores in the quarter, bringing its total to over 1,000 stores.

Meanwhile, GameStop expects to repurchase between $75 million and $125 million of stock this year. (GameStop repurchased 24.2% of its common stock between January 2012 and January 2016.)

Multitudes of short-sellers still need to cover their positions. Short covering has been ongoing since at least December, with another one million shares covered during the first half of August.

In addition, growth investors and dividend investors will continue to be attracted to GME, as the company achieves record annual profits, and offers a 4.6% dividend yield.

The P/E is ridiculously low at 7.4. Take advantage of the share price weakness, and buy GME; traders, growth investors and dividend investors could all benefit by scooping up GME shares.

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By Crista Huff, Editor of Cabot Undervalued Stock Advisor

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