Black Friday Deal: Best Way to Play GameStop Stock - TheStreet

Way back when my sons were young, when it came time to shop for birthdays and holidays, I did not mind at all shopping for my children. Having been a kid myself, I knew exactly what kids like me would want under the tree. And my kids are a lot like me. We like sporting goods, history books and video games. With items in those categories in mind, a Dad really couldn't go wrong.

As time passed, my sons turned into men, and the way video games are sold evolved. I am really happy with how my kids turned out. As for the mall-based chain store known as GameStop, the jury may still be out, way out. I would not at this point be at all fired up.

GameStop popped on Wednesday afternoon in contrast to the broader marketplace, after selling off all month long. Why? The firm reached a definitive agreement to sell its Spring Mobile business to Prime Communications. This move, expected to close this year, is in line with the firm's ongoing strategic review. Spring Mobile operates 1289 AT&T (T) - Get Report wireless locations and will raise $700 million.

What we do know is that video game sales, despite recent choppiness for related equities, posted a seventh consecutive month of gains across all categories in October. The good news? Software sales more than doubled year over year, while hardware and accessories also grew impressively. The conundrum for a firm like GameStop is how to grow their slice of a growing pie, when much larger outlets are willing and able to make these sales without the overhead associated with a physical presence.

Earnings

GameStop will report the firm's Q3 results next Thursday. Industry expectations are for EPS of $0.57 on revenue of $2.03 billion. The only whisper I have seen is for a slight miss on EPS. There are three items specifically that steer me away from this stock. Most noticeably, the stock trades at just 4.9x forward-looking earnings. The probable cause? Aggregate analyst expectations for this name are for lower revenue for the fiscal year 2020 than for the fiscal year 2019. The analyst community tends to err on the side of optimism -- as you and I both know. This is clearly troubling.

The third glaring sign of caution would be the dividend yield. The firm pays out $1.52 per share annually ($0.38 quarterly). Kids, that is a yield of nearly 11.1%. With earnings due next week, investors would expect a declaration on the dividend to be made with the intent to execute the payout sometime in mid-December. I would expect some shareholder anxiety going into that announcement.

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Should the dividend end up changing next week, I would think that the firm will not likely increase the payout. Best case for shareholders would be an announcement that leaves the payout as is. Is that what's best for the firm?

The Trade

I think the play here might be a simple purchase of one (minimally) $13 put expiring next Friday (November 30). As this purchase would cost the bearish trader $0.54 (last sale), I would prefer to sell a put with a lower strike, creating a bear put spread, thus subsidizing part of the expense.

I just do not see any value in any such bids down below, so this becomes a plain-vanilla options trade. My thought on such an announcement is that the three-times-tested $12 support level may become an issue.

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At the time of publication, Guilfoyle had no positions in the stocks mentioned.