GameStop (GME) has dropped some 40% in the past two months amid a bad earnings report, poor industry outlook and negative analyst sentiment -- but I believe that makes the S&P 500 component undervalued and a good investment opportunity.
A High Yield
GameStop's recent decline means that the video-game maker's dividend yield has cleared the 5% mark:
That should attract the attention of income investors who lack consumer-discretionary stocks in their portfolios, but those players will find that GameStop is one of just nine specialty retailers in the S&P 500. Of those, only four pay dividends, with GameStop and Staples (SPLS) offering the highest yields:
A Sustainable Dividend
In terms of dividend sustainability, GameStop has a solid outlook. The company's payout ratio swings wildly due to its business' seasonal nature, but has remained below 50% on a trailing-twelve-month basis:
GME also has $450 in free cash flow on a trailing-twelve-month basis, which can clearly cover its $153 million of projected dividend payouts over the next year:
Sound Operational Metrics
While GameStop saw the same kind of revenue pressures (-0.7%) and earning-per-share problems (-0.8%) that many companies faced last quarter, I don't think that justifies a 40% price drop.
The firm's return on equity clearly stands out against other operational metrics as highlighting GameStop's health. ROE has exceeded 20% over the past two quarters when calculated using trailing-twelve-month EPS. That's a level GameStop hadn't seen in the previous two years:
RSI Is Signaling a 'Buy'
While I'm not usually one for technical metrics, I do following a company's Relative Strength Index.
RSI measures a stock price's historical strength on a 0-to-100 scale, with a reading under 30 typically indicating a potential buy opportunity. GameStop's is currently under 12:
While that alone shouldn't persuade you to buy, I believe the company's dividend sustainability and operational performance compliment RSI in making GameStop a good value play here.