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Why GameStop (GME) Stock is a Compelling Investment Case

Alex Smith
·4 mins read

RF Capital Management LLC recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 18.8% for the second quarter (net of fees), underperforming the S&P 500 Index which returned 20.5% in the same quarter. You should check out RF Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, RF Capital highlighted a few stocks and Gamestop Corp. (NYSE:GME) is one of them. Gamestop Corp. (NYSE:GME) is a video game, consumer electronics and gaming merchandise retailer. Year-to-date, Gamestop Corp. (NYSE:GME) stock lost 21.4% and on August 18th it had a closing price of $4.81. Here is what RF Capital said:

"Gamestop (GME) – Gamestop continues to perform poorly as many of its stores have been closed due to COVID-19. However, ~85% of US locations were open with limited access and ~90% of international stores reopened with curbside pickup at the end of May. Management has also taken the necessary steps like Foot Locker has to manage the company through the current crisis. Inventory was reduced by 43% and accounts payable declined by 54%. $135 million was also drawn from the revolver with $35 million paid back in June. Currently, there is $570 million of cash on the balance sheet.

Going forward, management expects positive adjusted EBITDA in 2020, $575 to $625 million in cash and flat or positive cash flow from operations for the next quarter, and $43 million in CapEx (compared to $80 million last year). Also, peak availability on the revolver is likely to be around $430 million for November and December since the revolver is asset-backed by primary factors like inventory and accounts receivable. Before those last couple of months, the available amount is more realistically between $150 million to $250 million.

Other notable developments include an exchange offer and newly elected Board members. The exchange offer was for the $416.6 million of 6.75% Senior Notes due in 2020. 50.36% of those outstanding notes were validly tendered for newly issued 10% Senior Secured Notes due in 2023. Thus, management has bought the company some time by extending the maturity on some of the notes outstanding, albeit at a higher interest rate. Kurtis Wolf and Paul Evans (Hestia Capital and Permit Capital’s nominees) joined the Board as well. Both Wolf and Evans should be valuable additions to the Board given that Permit and Hestia have been long-term shareholders of GME since 2011 and 2012, respectively.

Like several of our other holdings, we are content with holding Gamestop at the moment given its balance sheet strength. We are optimistic that the new console cycle and key software titles will help GME return to profitability. Additionally, e-commerce sales continues to be a bright spot for Gamestop. Between March and April, the company experienced 1500% growth in ecommerce sales. For the quarter, the growth rate was 519%."

SFIO CRACHO/Shutterstock.com

In June, we published an article revealing that Miller Value Partners is bullish about Gamestop Corp. (NYSE:GME) stock. The investment firm believes that the company would emerge stronger from the coronavirus crisis.

In Q1 2020, the number of bullish hedge fund positions on Gamestop Corp. (NYSE:GME) stock decreased by about 15% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with Gamestop's growth potential. Our calculations showed that Gamestop Corp. (NYSE:GME) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.