Today’s new recommendation is a momentum stock from Cabot Top Ten Trader Editor Michael Cintolo. Wait for the stock to drop into his buy range before pulling the trigger.
“Long-term, we’re not big fans of GameStop Corp. (GME $31 NYSE); while the company has been doing its best to nose into the mobile and digital game industry, its core business of selling video games via brick-and-mortar outlets is clearly outdated and will shrink over time.
“But GameStop does have a big cyclical component to it, though the cycle has less to do with the overall economy and more with the industry itself — later this year, Microsoft is set to launch the latest version of its Xbox, with Sony’s PlayStation 4 hitting the shelves after that. Plus, Take-Two Interactive is releasing the next version of its Grand Theft Auto series (which has sold an unbelievable 125 million copies during the past few years) in the second half of 2013. When you combine that with the fact that gamers usually buy three, four or five games with (or soon after buying) each new console, it only makes sense that GameStop should have a great few quarters.
“We saw a similar thing with the company back in 2007, when a new console release cycle pushed earnings, and the stock price up dramatically. We’re not anticipating such an earnings bump this time, mainly because of the headwinds mentioned above. But the company is cutting costs (it’s closing hundreds of stores this year), is returning its large cash flow to shareholders (3.4% dividend annually), trades at a very low multiple (10 times trailing earnings), yet analysts see this year’s earnings flat and 2014’s figure up nearly 20% because of the expected uptick in the industry. It’s not a buy-and-hold-forever name, but right here, we think GameStop has good potential.
Technical Analysis
“After years on the outs, GME finally reached a low near 15 last August and had a nice off-the-bottom rally to 28 by mid-December. Then it went about building its first proper base in a very long time; the stock tightened up in late March (notice the very small weekly range at that time) before shooting ahead during the past three weeks. Because this isn’t generally a runaway stock, we think it’s best to target any new buying on weakness, with a stop in the 27 to 28 area. Suggested Buy Range: 29.5-31. Cabot’s buy range is valid for two weeks.”
- Michael Cintolo, Cabot Top Ten Trader, April 15, 2013