Like a lot of other people, I shorted GameStop in 2012. At one point that year, shorts controlled 75% of the float! But the stock went on a crazy sick run from August to November, gaining 250% and forcing a lot of people like myself to cover.
I don’t remember exactly where I sold and covered, but I didn’t take a big loss. I was actually quite good at taking small losses; My problem was I also took a lot of small gains. Quoting Jesse Livermore is easy, letting your winners run is hard.
I also don’t remember exactly what my thesis (lol) was, but I was probably thinking the internet would be disruptive to their business. Who wants to go into a physical store when you can just buy the game online? Apparently a lot of people. GameStop has done over $8 billion in revenue for each of the last five years.
And over this time, it’s business has defended itself okay against any outside assaults, with its gross margins holding up pretty well.
The problem is GameStop isn’t growing anymore, its net income in 2017 was the same as it was in 2014. It’s stock isn’t growing either, in fact, it has gotten clobbered. It’s now more than 70% off its highs.
I’m guessing this company’s best days are behind it, but has the stock already discounted all of that? Or maybe it hasn’t discounted it enough? Impossible to know.
The stock is trading at .15x sales, and 4x earnings. Yes there is hair on it. Yes it’s future is uncertain. And yes, value investing is hard. After all, stocks don’t get cheap because everybody loves them. But even a bad company (I’m not saying GameStop is a bad company, I have no idea) can be a good investment at a cheap enough price. The tough part is knowing when that point is.
Josh and I hit on GameStop and many other topics in the video below. Please subscribe if you like it, and excuse my appearance.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.