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TheStreet Open House

5 Investing Ideas As GameStop Squeezes Short Sellers

CHRIS LAU, KAPITALL: When GameStop (GME) broke past $30 and closed at $32.73, the short-interest, or bearish bet against the company, stood at 43.09 million shares. With 117.84 million shares outstanding, short float was a substantial 36.6%. How did short-sellers get caught off guard, especially when IDC reported sales declined 14% to 76.3 million units and NPD Group said in March 2013 that game sales declined 25%?

For GameStop, it turns out that a strong lineup of game titles for 2013 and extending throughout this year benefits the game reseller. Even though overall game sales are declining, hit titles drive profits for GameStop, game makers, and hardware game suppliers.

GameStop is up nearly 50%, outpacing the Nasdaq index as represented by the Nasdaq PowerShares ETF (QQQ) in the Kapitall chart below :

GameStop Outlook Positive

A renewal in the product cycle for consoles will benefit GameStop. Sony (SNE) is releasing a PlayStation 4 within the next 11 months, while Microsoft (MSFT) is poised to announce the successor to the Xbox 360. Nintendo (NTDOY.PK) also refreshed its Wii last year. Although sales weakened in recent weeks, the refreshed product benefits GameStop because the release improves awareness for games made for Nintendo.

In the past year, only Sony generated a positive return for shareholders. The rapid ascent in the last few months was driven by a drop in the value of the Yen, excitement for the PS4 launch, and strong Sony-made Android phones:

In March, game sales totaled $992.5 million. Take-Two’s (TTWO) BioShock Infinite led sales, beating out Activision’s (ATVI) Call of Duty. When charting the two game makers using Kapitall’s Compar-O-Matic to compare market cap to forward P/E (or “POP”), Take-Two has a much lower valuation:

Conclusion

Investors who ignored the negativity for an overall decline in game sales were right to do so. The negativity for game resellers was so strong that a short-squeeze in GameStop shares led to returns of nearly 50%. The seasonal weakness is fast approaching, and “selling in May” may once again prove itself correct. Investors could use the decline in the overall market to accumulate the companies mentioned.

Written by Chris Lau, Kapitall Contributor

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