The markets not moving much today with the S&P 500 $SPX500 around the same level it closed yesterday. The main news for our portfolio is Facebook CEO, Mark Zuckerberg, testifying about Libra in front of the Senate. Bitcoin $BTC and other cryptocurrency investors, Watch out! Travelers Companies $TRV is recovering from the unnecessary overreaction of the market yesterday after the earning miss. Good that I took the opportunity to buy some shares. Apple $AAPL and JPMorgan Chase $JPM reaches ATH.
ONE of my STOCKS GAINED 35% in a MONTH 🚀
I said that I was investing in GameStop $GME looking for a 35% gain in a year but the stock gained 35% in a single month. What should I do now? Hold or sell?
GameStop is the largest gaming retailer in the world owning several brands such as Micromania and ThinkGeek. They have over 5000 stores in 14 countries. However, in recent yeas, sales have been going down because of increasing competition from general retailers such as Amazon $AMZN , Walmart $WMT and Best Buy $BBY . Also, gamers now prefer to buy digital versions of video games online instead of going at GameStop. Since 2008, the stock price fell by more than 90%. In 2012, the stock rose again because of the latest gaming consoles, the Xbox from Microsoft $MSFT and the Playstation 4 from Sony $SNE . But after that the stock kept dropping. It lost more than 30% of its value in a day after announcing that it won't pay dividends anymore(which was at a yield of over 20%). Only recently started recovering after Michael Burry announced that he was investing in the company. He also sent the board of directors a letter telling them to buy back more shares.
Michael Burry was one of those people who predicted a bubble in the housing market in 2008. One of the characters from the movie The Big Short was based on him. He owns 3% and is acting as an activist investor. A few years ago, GameStop board of directors decided to buyback $300 million of shares and they already repurchased $63 million. He wants them to buy the rest as soon as possible. He sees next as a better year for GameStop because of the new consoles coming out.
Michael Burry sees GameStop as a cigar butt stock, that is, a stock which will not be able to do great in the future but still has the potential to return cash to the shareholders. This is how I see GameStop and that's why I invested. I believe that they should be buying back shares but I didn't buy because Michael Burry is buying but because I see that GameStop is trading under its intrinsic value and even book value. The company has a good balance sheet and the only reason why they are not profitable is because of impairment of goodwill. They don't have any goodwill but if you consider the brands, they still own some intangible assets which cannot be shown on the balance sheet because of accounting principles. Next year, they are going to be making more money than they are making this year. Therefore, I invested in GameStop. I don't see GameStop as a company that will do great in the future. They should be closing more stores or they would eventually go bankrupt. But I see them generating $200 million in free cash flow per year. I've used a discount rate of 18% and a margin of safety of 30% and found out that they are trading under their fare value. Actually, they have more cash than the current market cap. Another reason why I invested. Looking at the different scenarios, I saw an expected return of 35% for one year.
What should I do now that it gained 35% in a month? The best thing to do is to hold until December when they have the next earnings. There are three things that can be happening:
1. They are buying back shares and that's why the shares are going up
2. They are buying back shares and repaying some of the debt - the ideal thing to do in my opinion
3. Exuberance from Wall Street because Michael Burry is investing in GameStop
If this is the third case then Wall Street will be disappointed in December and it won't be so good to hold the stock then. For now, I will keep holding and if the price goes above intrinsic value, I may trim some positions.
Watch the full video on YouTube:
https://www.youtube.com/watch?v=hHqDaMxFk3s&list=UUPO3uUyoXSaFWG-Ldq1mqEQ
You can find my full GameStop analysis here:
https://ishfaaqpeerally.teachable.com/courses/662813/lectures/11816947
For more, join my private investing group on Facebook:
https://www.facebook.com/groups/IshfaaqInvesting/