Today’s news: Commentary on U.S. stock market, and management changes at GameStop (GME).
Good morning! It’s early in Colorado as I write—even though I know that subscribers in Italy are planning their evenings now. Buona sera!
I normally write my weekly updates between Friday night and Sunday night. Then I tweak them on Monday morning based on the latest news and price changes, and send the update to my editor for publication on Tuesday. Since I will be on an airplane during market hours this coming Monday, February 12, I want to apologize in advance if there are any big pieces of news or price changes on Monday that I fail to incorporate into next week’s update.
Right now, my advice is to continue to deploy cash into your favorite stocks. There are different approaches to take: you can buy stocks in a strong sector (financials), you can add to positions that you already own, you can buy stocks that you’ve earmarked for such a time as this, you can buy stocks of quality companies that seemed to fall a drastic amount, you can buy stocks of quality companies that barely fell, such as Interpublic Group (IPG). All of those are valid approaches to “buying low”.
The coming months will likely provide enhanced short-term trading opportunities, as U.S. stock markets settle into sideways trading ranges. As an example, Nucor (NUE) will likely trade between 61 and 70 for a while. Nobody ever really buys at the exact bottom and sells at the exact top, but even if you were to buy at 62 and sell at 69, you’d have an 11% capital gain, and maybe also a dividend. I’ll do my best to identify stocks with seemingly-stable trading ranges in next week’s update, so that you can stay active and maintain a modest amount of control over your stock portfolio during this volatile time period.
GameStop (GME – yield 9.6%) named Michael Mauler as its new CEO on February 7. Mr. Mauler is a 16-year veteran of GameStop. Former CEO J. Paul Raines formally resigned due to his serious health problem. May God bless Mr. Raines with good health and peace!
Today it was announced that Mr. Mauler terminated the employment of the company’s Chief Operating Officer and its executive vice president of strategic business and brand development. The terminations took place with the approval of the Board of Directors, and no specific reasons were provided.
The stock market will perceive Mr. Mauler as being a decisive, take-charge person who has a clear idea of what he wants to accomplish for the company. The most obvious and near-term telling decision will be upon us in a few weeks, because GameStop typically raises its dividend annually around March 1.
There are four dividend scenarios that could take place: the dividend could be increased, the dividend could remain unchanged, the dividend could be reduced or the dividend could be removed. There’s nothing about the company’s finances that lead me to believe that the full dividend payout will not continue. I only point this out because Mr. Mauler clearly has a plan, and we need to consider all possibilities. If he wants to use that cash to fund something else—business expansion, M&A activity, debt repayment—then a dividend cut is possible. The company currently spends $154 million per year on dividends, and has $817 million of long-term debt on its balance sheet, as of October 28, 2017.
Alternately, if Mr. Mauler were looking for a source of funds with which to finance new ideas, he could simply stop repurchasing stock. The company repurchased 19.7% of its outstanding common shares between January 31, 2013 and October 28, 2017.
I mention all this speculation about the dividend and share buybacks, not because there are any red flags, but because I’m simply trying to guess, “With a new CEO in place, what is the potential downside?” So despite the company not having cash flow or debt problems, I’m stretching my imagination so that you, too, can understand “What is the risk in my ownership of GME?”
Another alternative that should be considered is that the company could be a target of M&A activity. After all, the market capitalization is only $1.6 billion. There are large entities—corporations and alternative asset managers—that could buy GameStop with cash-on-hand.
I’m going to leave the Buy recommendation on the stock. GameStop’s Board of Directors has had plenty of time to consider Mr. Raines’ replacement during his lengthy illness. Odds are that they gave Mr. Mauler very careful consideration, and his selection was a wise one. Buy.