When it comes to stock picking, I use a three criteria system. First, fundamentals — the stock’s fundamentals have to warrant the stock price moving higher for the foreseeable future. Second, optics — the stock’s optics have to attract more buyers than sellers to the stock for the foreseeable future. Third, technicals — the stock’s chart has to support the bull thesis.
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Usually, only top quality stocks pass my three criteria system. After all, it’s tough to find stocks where fundamentals, optics, and technicals are all favorable. But, at the current moment, one very “low quality” stock passes this litmus test: GameStop (NYSE:GME) stock.
Sure, GME stock has been in a secular decline for several years now, and the long-term fundamentals aren’t great here. In the long run, this company is going the way of Blockbuster.
But, in the near term, GameStop stock is supported by favorable fundamentals, optics, and technicals. As such, after stating the tide is turning on GME stock last week, I’m doubling down on that call today. Over the next few weeks to months, I reasonably see GME stock heading materially higher from today’s depressed levels — though such a rally does not come risk-free.
The Fundamentals Are Good Enough
When it comes to GME stock, the long-term fundamentals aren’t good. In the long run, the video game world is pivoting to all-digital, all-the-time model. That pivot will ultimately make GameStop stores antiquated.
But, in the near term, GameStop’s fundamentals are good enough to warrant a multi-week to multi-month bear market rally in GME stock.
First, GameStop stock is just too cheap to ignore. The company has $480 million in cash on hand, is cash flow positive, and projects to remain cash flow positive for the foreseeable future. Thus, that $480 million in cash isn’t going anywhere anytime soon. Yet, GameStop’s market cap is $350 million. In essence, then, GameStop has enough cash on hand to buy out the whole company.
As such, even though GameStop’s operations are in secular demise, this demise is presently being overstated by the market.
Second, GameStop’s earnings next week should be much better than expected.
Those numbers will cover the months of May, June, and July. May and June video game sales trends were awful — hardware and software sales were down big in both months. But, July eked out a rare gain in video game sales, led by big new software releases (Madden NFL 20). Plus, video game publishers Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive (NASDAQ:TTWO) all beat bookings estimates for the overlapping quarter.
Broadly, then, it appears that video game industry trends actually improved throughout the second quarter, and that improvement should show up favorably in GameStop’s Q2 numbers.
Third, GameStop has sizable catalysts on the horizon in 2020 which should keep the numbers at least halfway decent for the foreseeable future. Namely, new next-gen gaming consoles are launching next year. Those consoles will importantly include physical disk drives. Thus, the new console launches next year should be accompanied by a sizable uptick in physical video game sales, which should keep GameStop’s numbers respectable for the next 12 to 16 months.
The Optics Are Improving
Equally important as the fundamentals, the optics are improving with respect to GME stock, and these improving optics should help keep the current uptrend in GameStop stock alive for the foreseeable future.
Most important to the optics is that hedge fund manager Michael Burry – -who rose to fame as being the “Big Short” guy who called the housing market bubble of 2008 before anyone else — has publicly voiced a bullish stance on the company, disclosed a big ownership position and laid out a compelling bull thesis which involves the company completing its buyback program and burning shorts ahead of big 2020 new console launches.
Investors are clearly listening to Burry. GME stock is currently in the midst of its biggest upturn in several years.
If next quarter’s numbers are good — as I expect them to be — then the optics will get even better. You will have a beaten up company that a very smart and famous guy is behind, with a strong earnings report under its belt, and visible pathway to materially higher share prices. That is the sort of optical situation which is representative of a reversal in a secular downtrend.
The Technicals Are Impressive
Also of note, GameStop stock is supported by healthy technicals here which do lend credibility to the turnaround thesis.
Namely, GME stock is currently in the midst of its biggest rally of 2019, and one of its more convincing rallies in recent memory. If next week’s earnings report is good, this rally will persist, meaning it will probably turn into the biggest rally in GameStop stock in five years or more (in terms of percent gain).
If that’s not indicative of a turnaround, then I’m not sure what is.
Bottom Line on GME Stock
I’ve been consistently bearish on GME stock for a long time now. But, I think it may finally be time to ditch the bear’s hat, and put on a bull’s hat. Over the next few weeks to months, the fundamentals, optics, and technicals could all align here in a favorable way, and push GME stock materially higher.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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