This Gaming Company Could Be Your Most Profitable Short Yet

Keith Fitz-Gerald Apr 01, 2016
16 

When I started Total Wealth, I promised you that I would show you how to make money in all market conditions – both good and bad. And, as part of that, I told you I would help you find opportunity in companies that are going up…and down.

Today I want to keep that promise with a look at a gaming company that could be your most profitable short to date. That’s not a statement I make lightly either considering what we’ve accomplished so far.

In 2015, for example, I pinpointed a handful of companies ready to collapse and told you how to play them to the tune of some terrific double digit profits even as other investors were left wondering what hit them. Examples include: 57.36% from Shake Shack Inc. (NYSE:SHAK), 35.75% from Zoe’s Kitchen Inc. (NYSE:ZOES), 41.43% from Twitter Inc. (NYSE:TWTR) and 41.21% in just the last three months of 2015 alone as GoPro Inc. (NYSE:GPRO) went from hero to zero in the eyes of the investing public.

Now it’s time to do go after another overinflated, overvalued company. Only this time the potential could be even bigger because it’s out of touch with the technological changes that threaten its existence.

Here’s your most promising shorting opportunity of 2016 so far.

An Ideal Setup for Quick Double Digit Profit Potential

You may not be familiar with GameStop Corp. (NYSE:GME) but chances are your children or grandchildren are. It’s an American video game, wireless services and consumer electronics retailer with more than 4,000 locations across the United States.

The company is having a good year given that it’s returned  12% since January 1, 2016 and is beating the Dow by 4 to 1… right up until you realize that it’s still trading 33% below the 52 week high it set last August at $47.83 a share.

Gamestop’s big edge over other video game retailers has traditionally been something known as the  omnichannel program, which gives video gamers the option of buying games online then rushing to the store to pick up their purchases in person rather than having to wait three days for shipping. That’s kind of a head scratcher for most people given how we think about shipping versus traditional retailing, but for gamers it’s been an important selling point.

That’s all changing.

In store pickups are cratering even as they’re being replaced by digital downloads in a never ending cycle of “buy it now get it now.”

What’s more, they’re being replaced at a speed that’s people don’t understand despite the fact the change is happening quite literally right in front of them. To give you an idea, digital sales totaled just 20% of all video game sales as recently as 2009. But, two years ago, they eclipsed personal pickups for the first time and have never looked back.

And that’s your opening.

Companies that react well to transformative times adjust rapidly to the new reality that their customers represent. Companies that don’t will die.

Consider McDonald’s Inc. (NYSE:MCD).

The company got pummeled in 2014 with a series of failed menu items, poor management, and a CEO who was arguably completely out of touch with the dynamic changes facing him. Things were so bad that I actually removed MCD from my “buy list” for the first time in years.

Then, Uncle Ronald did the unthinkable and reversed course, revamped its menu, shut down stores strategically, and introduced new items catering to modern-day diners. Not surprisingly, its stock shot up 35% on reinvigorated sales in 2015. Once again, it makes a great investment.

But GameStop’s CEO Paul Raines isn’t taking the same approach as McDonald’s CEO Steve Easterbrook did. In his company’s Q4/2015 report, released just a few days ago, he touted his company’s expansion of physical locations, which shouldn’t be a priority to anyone focused on riding the digital revolution. Even more telling, he revealed that digital sales had increased just 9.7% year-over-year. In contrast, global digital sales for games jumped 11% last October alone.

The latest earnings numbers suggest to me that GameStop is paying the price for its failure to adjust to a new market. The company’s  quarterly revenue growth has actually declined by 3.6% year-over-year, which is particularly dire when you consider GameStop has managed to shrink its revenues in the middle of a $111 billion gaming boom.

You could make the argument that the company is in transition like many analysts are. However, don’t forget that transitions require cash, and GameStop doesn’t have a lot that on hand. In fact, the company has only $186 million versus $350.9 million debt according to Yahoo!Finance.

The situation reminds me of BlackBerry Ltd. (NasdaqGS:BBRY).

That company found itself in a similar situation in early 2011 to where GameStop is today. It was up 20% for the year, and had beaten the overall markets by a factor of three to one.

Like GameStop today, BlackBerry could also boast of impressive-sounding growth in certain segments. The company’s smartphone shipments had grown 43% over fiscal year 2010, and it was the number one smartphone supplier for the U.S., U.K., Latin America, and Canada at the time.

But it was little more than a sunset glow. Over the next 18 months, BlackBerry’s stock would fall 81% as it ceded ground to more innovative rivals like Apple and even Samsung.

Today, BlackBerry commands just 3% market share of the smartphone sector, and it’s a cautionary tale of a once-great company that was undone by greed, avarice and simply being on the wrong side of an Unstoppable Trend like Technology.

Barring a massive change in thinking by key executives, I don’t think GameStop can stay in the game.

Until next time,

Keith

16 Responses to This Gaming Company Could Be Your Most Profitable Short Yet

  1. MARIO BOLTRI says:

    Thanks Keith for the Short recommendation,, but I have been waiting for the next X pattern stock buy !

  2. Jesse John Jobes, Sr. says:

    I am a little guy, I have no funds on par to what I read about in your tips, suggestions, etc. How can I get in the game? Again I am talking about pennies, when you talk about $1000 of dollars.

  3. Alex Yokubaitis says:

    Keith –

    Exactly how do we “short” GME and by how much?

  4. Don Hellkamp says:

    It usually does. Don

  5. SERGIO FONTAL says:

    What do I do now? How can i profit from this?

  6. Martin says:

    Great article, thank you. Can you suggest exact instructions as to how to play this? Do we just place a simple short or work this some other way? How far out in time are we looking? Might someone want to buy the company and turn it around?

  7. Stan Dudka says:

    I would recommend a simple option strategy to short GME:

    Buy Jul 16, 2016 Put at strike price 34. This is in-the-money option with over 100 days to expiration (to reduce negative effect of time decay), delta of around -60%, and premium (as of Friday close) of $4.50 per contract. If GME declines from $31.30 to $25 (20% decline), the option will go up to around $8.60, that is about 90% return. It is likely that the option will appreciate more due to increase in implied volatility and positive effect of gamma on value of delta.

    Stan Dudka

    • JEFF STILLWELL says:

      I’m jumping on the 31 strike at 2.70. if GME goes to 25, this premium will go to over $6. Only dropping to 26.50 will get us a double at 5.40… “IF” haha

  8. George E Gilmore says:

    Amazing!!!!

  9. Mark says:

    Keith,
    The company is still in the midst of a stock buyback program where in the last quarter the company bought over 1.5 million shares at an average price of $31.28. Since that program continues, doesn’t that effectively place a floor on the stock price of somewhere in the $30-31 range? Doesn’t leave much profit for a short if that proves to be the case.
    Mark

  10. Richard T Stanley says:

    Get a life and study Put Options. Even better look at put spreads ….. In any event some study time in in need here!

  11. Matt says:

    What is a good short because I’ve shorted TSLA and MMM and lost over $8000. Because of recommendations of the super crash and dreaming that the Dow is going to crash. It’s a shame these experts can’t be held countable. Or talk to you personally on what to do next on the timing of the markets

  12. R. .J. says:

    Can someone answer?

    I buy a put, pay a premium for a contact, and have the right to sell the underlying at the strike price. Or it can expire worthless.

    As an example, the option chain for a GameStop put, May 20, with a strike price of $29.

    The stock is currently $31.34.

    I can exercise the option and sell the stock for the current market price and realize a profit, net my premium and miscellaneous expense.

    If the underlying drops to, say, $24, I still have the right to exercise the option and sell at the strike price of $29.

    So who, exactly, is buying a $24 stock for $29?

    The option writer?

    I can also sell the contact if it’s in the money instead of exercising, however, the re-sale price of the contact may not be a 1:1 correlation with the incremental drop of the underlying.

    Is re-selling an in the money option market-driven? In other words, is it a matter of what buyers and sellers are willing to pay and accept (bid/ask)?

    On the other hand, I’m reading that the price one would receive in the market would be equivalent to the gain of exercising.

    • Houyhnhnm says:

      >So who, exactly, is buying a $24 stock for $29?

      >The option writer?

      Yes.

      >I can also sell the contact if it’s in the money instead of exercising, however, the re-sale price of the contact may not be a 1:1 correlation with the incremental drop of the underlying.

      It won’t be until all time value in the put is lost.

      >Is re-selling an in the money option market-driven? In other words, is it a matter of what buyers and sellers are willing to pay and accept (bid/ask)?

      Yes, priced just like stocks, except the spreads are dramatically worse.

      >On the other hand, I’m reading that the price one would receive in the market would be equivalent to the gain of exercising.

      That’s true when the time value drops to zero. You also have to consider commission for excercising an option. At my broker it’s dramatically more expensive than trading a stock or option.

      Houyhnhnm

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