GameStop - Tadpoles in the Stew?
We noticed that shares of GameStop Corporation (NYSE: GME) were hammered on Tuesday, down almost 4.5% from the previous day, on volume that was almost 2.5 times the norm.
While we don't have a position in GameStop, we think it is a fairly well managed company with reasonable financial metrics. So the price change and the volume increase certainly got our attention and made us wonder just what was going on.
Financial information related to GameStop Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending January 31, 2009 as filed with the with the Securities and Exchange Commission on April 02, 2009.
What We Found
At the outset, the only reason we could find for the increase in volume and large price fluctuation was a single news article titled Critical Alerts for Yahoo!, DIRECTV, CIT, Toyota, and Gamestop released by Seven Summits Research.
Having seen things like this many times over the years, we decided to see what Seven Summits Research actually did.
As it turned out, Seven Summits Research is Seven Summits Strategic Investments, a company that according to Securities and Exchange Commission filings, employs NO registered representatives of a broker-dealer, and has NO assets under management.
The company is run by a Mr. Victor H. Schiller, who posts at a stock blog site and describes himself as an analyst with an attitude. Mr. Schiller also writes for Investors Observer, a site owned by Fresh Brewed Media.
While Mr. Schiller may indeed have an attitude, one thing he apparently is not is a CFA Charter holder, making him, in our opinion, just another web wannabe instead of the analyst he likes to call himself.
We did search the web in an attempt to learn a bit about Mr. Schiller and came across an interesting discovery. Mr. Schiller may be a patent holder.
According to information we found, a patent was apparently granted for:
"A method for generating natural language news-based stories directed to financial instruments named in a portfolio, the method comprising the steps of:selecting a portfolio of financial instruments using a computer interface; and offering a choice on the computer interface between creating a strategies page or a news stories page produced from each of the financial instruments in the portfolio,wherein the news stories page comprises a plurality of natural language news stories, each including a date of publication, a story rewritten in natural language using a template from a news brief, and a source of origin for the news brief."
We have no idea if Mr. Schiller of Seven Summits is the patent holder, hell we have no idea if Mr. Schiller is a real person, we just found it interesting that there is a patent for news articles directed to financial information, that Mr. Schiller's company issued a Critical Alert about a company we have on our watch list, and the daily trading volume for the stock of that company increased by 250% and the price fell almost 4.5%, on the very day the Critical Alert was released.
We also have no information, nor did we attempt to find any information, stating that Mr. Schiller, any of his companies, or anyone, or any entity that is currently or has ever existed in the solar system of which planet Earth may or may not be apart, derived any benefit, financial or otherwise, from the changes in price of any of the stocks mentioned in the Critical Alert.
In an attempt to keep from getting sued, we did continue to search the web for other possible reasons for the Gamestop volatility and final found several other articles posted, including a downgrade from Credit Suisse which may have contributed to the volatility in the stock price and the increase in trading volume on that day.
In The End
Having considered the information we found, not about GameStop but around news events surrounding Gamestop, we have to wonder if the common investor really did take it in the end?
Certainly we have no idea this happened, nor are we even remotely qualified or smart enough, to answer that question.
Instead, what we would like to highlight is that when it comes to individual equities, investors need to have a time horizon larger than a nanosecond. They need to ask themselves what they expect an investment in a specific company to do for them, and they need to be realistic in the length of time they are willing to allow an investment to work in order to achieve expectations.
According to the trend line, the stock is in a clear downward trend, having moved recently from an over bought position to an almost over sold position, and based on the current MACD, this trend could continue for the next several weeks.
The stock closed recently at $19.17, with first resistance at $21.16, a 10% upward move from its recent close, and first support at $18.27, a 5% decline from its recent close, we simply don't think the 5% spread is enough to consider a short-term investment at this time.
Long-Term (5 Year Hold) Investment
We happen to think that a Reasonable Value Estimate for GameStop is in the $50-$55 range, and think the time to start a position in the stock will be right after the company announces fiscal 2010 earnings, which we believe will be closer to fiscal 2008 earnings.
While there is certainly room for improvement with some of the financial metrics we like to focus on, debt per share of $3.25 being the main metric that needs improvement, we do like the company's free cash flow, which for fiscal 2009 was close to $3.30 per share.
Assuming we are correct in our thinking, the price should drop a bit once fiscal 2010 earnings are announced, providing investors an opportunity to buy shares in a pretty good company at a price well reduced relative to our reasonable value estimate.
For the Wax Ink GameStop Raw Value worksheet, please click here.