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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Special Bulletin

One of our stocks is down 12% this morning after reporting another mixed-but-good quarter yesterday afternoon.

GameStop Reports Unexpected Revenue Beat; Traders Trash the Stock

GameStop (GME – yield 8.0%) is down 12% this morning after reporting another mixed-but-good quarter yesterday afternoon. As a reminder, the company is in the midst of a transition away from a concentration in the physical gaming business, diversifying into technology brands, collectibles and more.

There was lots of good financial news in the earnings report, including total revenue and same-store-sales beating analysts’ estimates. There was a one cent EPS miss, coming in at $0.15 per share. (GameStop is a typical retailer that experiences a huge revenue surge in the fourth quarter, which should be additionally boosted this year by the new iPhone launch. Current third and fourth quarter EPS projections are $0.45 and $2.09, respectively.)

There were hefty increases in revenue from the following channels: International, hardware, digital, collectibles and technology brands. Software sales were down in the quarter. Five new collectibles stores were opened, bringing the total to 99.

CEO Paul Raines stated, “Looking at the second half of 2017, the Nintendo Switch, the launch of Microsoft’s Xbox One X, and a solid slate of AAA titles should drive growth in the video game category. In addition, we expect that our Technology Brands AT&T Wireless business will benefit from a boost in consumer demand driven by the launch of innovative new mobile handsets, including Apple’s next-generation iPhone.” Read more in the quarterly earnings press release.

While the company does not like to give quarterly guidance, they did announce that full-year same-store sales will likely come in at the top of their previous estimate range. Normally, the market loves info like that. The shift in the product mix to international business, collectibles and technology brands is working. It just needs more time.

Unfortunately, GME is a favorite of traders, many of which love to trash the stock. Then investors come in and buy up shares to catch the rebound, the huge dividend and longer-term capital gains.

If a company is having a bad year, I hold onto the stock as long as their next-year’s outlook projects at least 5% to 10% growth in EPS plus dividend yield. Despite the terrible price performance, GME has always earned such estimates from analysts.

One of the characteristics of undervalued stocks is that they’ve been left by the wayside by investors, and that’s what makes their value situation compelling. I try very hard to wait to buy them until the price is ready to rise. Sometimes, though, the share price takes another downturn after purchase, while the numbers remain attractive. When that happens, I wait it out. Hold.