GameStop Risky but Worth Playing

 | May 28, 2013 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

gme

,

msft

The worst performer among the 500 stocks in the Standard & Poor's 500 Index last week was GameStop Corp. (GME), down more than 19%.

I would buy it here. GameStop closed Friday at $32.11.

This is a volatile small-cap stock, in which investors tend to overdo alternately their enthusiasm or their disdain. At the moment, I think the pendulum has swung to excess negativity.

Based in Grapevine, Texas, GameStop is the largest U.S. retailer of electronic games, new and used. The last time I was in one of its stores, the customers were mainly young males in their teens and early 20s.

The challenge for GameStop is to compete in a world where electronic games are available at low cost on smart phones and other mobile devices.  I think the company can live with that challenge.

GameStop has turned a profit in nine of the past ten fiscal years, the exception being last year (ended January 2013) when it lost $2.13 a share. Its best earnings were $2.65 a share in fiscal 2011.

The current fiscal year should break that record. If analysts are right, GameStop will earn $3.16 a share in the fiscal year ending January 2014.

Why did the stock fall on its face last week?  There were press reports that the newest Microsoft (MSFT) Xbox game player will require users to pay a fee to play used video games on it. The money a buyer pays for a used game will be divided three ways between the game creator, Microsoft and GameStop, wrote Erik Kain in Forbes.com. He called this "terrible news for GameStop."

Maybe that is true. But let's maintain some perspective here.  Before last week's tumble, GameStop shares had advanced 11 weeks in a row, and were up 60% for the year to date. Even after last week's bitter medicine, the shares are still up 28% for the year.

It seems to me that part of the reason GameStop shares fell so far on the Xbox news was simply because the stock needed an excuse to pause.

These always were, and probably always will be, volatile shares. GameStop stock rose 125% in 2007 and fell 65% in 2008.  This year's rollercoaster included a 25% advance in April and last week's 19% dive.

Post-dive, the shares sell for 10 x earnings and yield 3.4% in dividends. The company is debt free, a wise choice in a tumultuous and fast-moving industry. I like the stock near, or below, the present price of $32.            

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