Is Optimism Too High for GameStop Corp (GME)?

01/15/2009 12:09 pm EST

Focus: STOCKS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

A quick glance through the analysts’ most liked stocks screen reveals GameStop Corp (GME). This retailer of video game products may be a favorite on The Street, but you may want to consider a couple of points before jumping on the bullish bandwagon. Let's start with some numbers.

According to Zacks, 12 analysts follow the stock, and all 12 give it a "buy" rating. Digging into the data shows the overwhelming majority of analysts have been in the bullish camp for well over a year now.

With that knowledge in mind, take a look at the charts below. The one on the left shows the weekly price action, while the one on the right highlights the recent performance. What we have is a stock that is bouncing amid an intermediate-term downtrend.

In past articles, I have described this situation as a case of trapped bulls. The analysts have been caught on the wrong side of the decline, and the risk is that they may be looking to exit into strength. The stock has bounced from its November lows, but is still down more than 50% over last year and is well off its all-time peak, hit in December 2007.

As they stand now, the shares have neared a short-term overbought condition as they challenge their mini-peak from last month. The stock is top-heavy with buy ratings and I think there is a real potential for downgrades.

By Nick Perry of Schaeffer’s Trading Floor Blog

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