Get into GameStop

 | Jun 20, 2014 | 11:00 AM EDT  | Comments
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Stock quotes in this article:

gme

,

bby

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conn

Games are serious business. If you have children you know what I mean.

The largest retail player in this world of players is GameStop (GME), operator of 6,650 company-owned stores in 15 countries, plus an online presence. It sells new video games, but stands out from the crowd by being the dominant retailer of used games. I have seen estimates that it accounts for as much as 80% of used video game trade-ins.

GameStop is worth discussing for a couple of reasons. For one, it is part of the retail industry that deals with technology. Others in this space include Best Buy (BBY) and Conn's (CONN). To choose stocks, I rely on about a dozen computerized strategies I modeled on how some of Wall Street's best invest their money and that of their clients. These strategies also judge the investment desirability of industry segments and, right now, the technology segment of retailing is the highest rated among all industry segments.

In addition, GameStop gets the highest grade from one of these strategies, that of Joel Greenblatt. This strategy is notable because it has, over the years, performed very well, plus it only uses two variables. Since I began following the Greenblatt strategy in December 2005, it has produced an average annualized annual return of 11%, more than double the S&P 500's return of 5.1% for the same period.

The strategy's two variables are earnings yield and return on total capital. Earnings yield is earnings before interest and taxes divided by the company's enterprise value, which includes not only the company's market cap, but also the amount of debt it uses to generate earnings. Greenblatt is measuring how much of a return you could earn if you bought the entire business, including all of its debt.

Return on total capital is earnings divided by tangible capital employed (net working capital plus net fixed assets). This variable measures how well a firm uses its capital.

The strategy first ranks how well a company performs compared to all others among the thousands of stocks in our database based on each variable and then combines these rankings into a final one. Among all stocks, GameStop today ranks 22 for earnings yield and 49 for return on total capital. To earn the strategy's highest score, a company has to be among the top 50 from among all stocks. GameStop shows its playing prowess with a very impressive No. 4 ranking.

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