The main news today is the victory of the Conservative Party in the UK elections. The FTSE 100 $UK100 and Pound $GBPUSD doing great today. This is of course, not such a great news for our company Diageo $DGE.L which thrives in a weak pound environment. But in the long-term, it will do great.
Although president Trump tweeted yesterday that a deal is coming, recent news suggest that there are uncertainties around this and the markets $SPX500 open a little lower today. The biggest winners in our portfolio today are $FIT $AAPL and $AGN . As for the big losers, its GameStop $GME and Polymetal $POLY.L . Polymetal appointed a new director on the board and it seems that some investors don't approve of this are sold some shares.
GAMESTOP STOCK CRASHES by 15% - To hold or to sell? 🎮
GameStop $GME had terrible earnings, sales went down by 25%, the company is losing money(last time it was because of impairment of goodwill, this time it is for real) and the stock crashed by 15% in single day. What should we do with it now?
GameStop lost money in all the sales categories except collectibles. The main reason why their sales is going down is because they are unable to compete. Now, people buy physical video games on Amazon $AMZN , Walmart $WMT or Best Buy $BBY and it is also people to just download the games from the internet. GameStop has 5600 stores in 14 countries and these stores are not selling that much. Another reason why the sales are down is because of consoles cycle. Next year Microsoft $MSFT is launching a new Xbox and Sony $SNE is launching a new PlayStation. There is no need for people to buy these this year. The sales and stock price of GameStop always go down during the end of a market cycle. GameStop is losing money because of high Selling, General and Administrative expenses (SG&A). They have to maintain these 5600 with thousands of employees. All of that is expensive. They have to cut expenses. They are closing stores but not really as fast as they should.
If we look at the balance sheet of GameStop, we see a different picture. They have a really great balance sheet. They have low debt and enough cash to buy back 75% of the company. Actually, in the last quarter, GameStop bought back 35% of shares and they are going to buy more shares. If GameStop in the future becomes profitable, this will be a real boost to the stock price. With such a balance sheet, GameStop will not go bankrupt anytime soon but they will have to change their business model to survive in the long-term.
Here's what the company should do right now:
1. close more stores
2. Buyback more shares and repay all the debt(it is possible with the cash they have)
3. Wait for next consoles to come out
The company is trading under its book value and also under its intrinsic value. There is no reason for me to sell this company. Therefore, I'm holding. Will I buy more? The mistake that I made was to buy too quick. I saw the stock price rising and because of the fear of missing out, I started buying. I should have waited. Anyway, I'm still making profits on GameStop despite the massive fall. Right now, however, would have been a great time to buy more.
GameStop is a cigar butt stock. I'm not holding on this stock because I am looking for a big recovery in the business(if it happens - good). I'm holding on to these company awaiting the next consoles to come out next year. In 2012, the stock crashed and then bounced back to gain 240% in 15 months. I'm not saying that it will happen again. But there is a high probability that sales will go up next year along with profits and consequently stock price.
Let's not forget that Michael Burry is also investing heavily in GameStop and this is the largest position in his portfolio.
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