Wednesday, February 8, 2012

Going long on GameStop (GME)


   I have cashed out my LNKD puts today, ahead of tomorrows earnings. I did not want to take chance especially after my trade gained better than 50% in 3 sessions. I will be holding my NFLX short options until next weeks options expirations to realize full gains.

    GameStop Corp (GME) is trading higher today after the company announced dividend for the first time. I see several positives for the stock and I am going long on GME today. GME is a very profitable company adding more than $400 million to bottom line every year.
Stock chart pattern has completed a triangle, in the last three months and stock will break either to the upside or the downside. There could be a quick move in the stock price once it breaks out.
     My guess is that, it will break to the upside because of the following reasons:
  1. Stock is very cheap, trading at 7.75 times forward earning, 1.1 times book value and no debt. In a world where investors are paying 1000 PE for a social media company and valuing a gaming company with couple of thousand paid subscribers as a $10B company, it makes more sense to invest in GME. 
  2.  Dividend announcement will bring new class of investors, into the stock.Yield is better than the US treasury and the payout ratio is very low, still leaving room for company to make investments or buyout shares.
  3.  There is too much, short interest in the stock. 34.8% of total floating stock is shorted. After the company has tripled its earnings in past 5 years and the stock has stayed flat, its time for GME to move and short covering will fuel a nice rally.

Courtesy: Yahoo Finance

    While, my reasons for trading the stock the stock are purely technical, its gives great comfort in knowing that the company is doing great fundamentally. I found a bullish article written by Paul Franke and here is the link: http://beta.fool.com/quantemonics/2012/01/29/why-ben-graham-would-love-gamestop/1393/?source=eogyholnk0000001
  
      Factors standing in the way for upside are:
  1. Significant resistance around $25 and
  2. Disintegration of Europe that might take the entire market down.

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