|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
GameStop: Still in Business?
Posted by: Barel Karsan (IP Logged)
Date: April 4, 2013 07:31AM
GameStop (GME) is easily one of the most controversial companies I've ever written up. Right from my first article on this company some three years ago (all of them are browse-able here), I began to receive a number of bearish comments on the stock. Short interest on this stock has reached upwards of 50%, with the very smart Jim Chanos among them. As a result, I think this investment illustrates some very important lessons that every value investor should remember.
First, predicting the future is hard, even when it seems obvious. Shorts saw the demise of Blockbuster, and saw the same fate awaiting bricks and mortar retailer GameStop. But predicting the timing of such events is wrought with failure. This is why low P/E investing works: today's cash flows turn out to be worth more than the future predictions.
Second, do your own research. Jumping in on the trades of other notable investors (in this case Chanos), no matter how smart they are, isn't smart investing. Even Warren Buffett has made a ton of mistakes, and will readily admit that he's right barely more often than he's wrong. If you have done your research and believe you are right, don't be afraid to go against a large number of shorts, either. It's not just longs that are subject to herding.
Third, quality management can make all the difference. If GameStop had had the same managers as Best Buy (BBY) or RadioShack (RSH) for the past few years, my opinion is the company would be facing a lot more trouble. Instead, GameStop's management excelled in two ways compared to its bricks and mortar peers: operations and capital allocation.
While competitors Wal-Mart (WMT) and Best Buy tried to commoditize this industry by competing on price, GameStop sought other ways to add value for customers, and created itself a moat in the process. GameStop's used game business could not be replicated thanks to the network effects created by successfully executing on its first-mover advantage. (This is very similar to why eBay (EBAY) can dominate its market: buyers have to go there since that's where the supply is, and sellers have to go there since that's where the demand is, creating a positive feedback loop that provides pricing power and protection against competition). Management has since sought to expand on this moat by taking advantage of data gleaned from its rewards program, and by expanding the type of used product (e.g. phones, tablets) that can be sold.
Other management teams are good operationally, but then blow cash on iffy projects in an attempt to build an empire. Not so with this disciplined management team. The vast majority of free cash flow generated has been used to pay off debt and buy back shares at very cheap prices. Some technology platforms were purchased in order to hedge the company against online competition, but none of these acquisitions "bet the company" on such uncertainties. As a result, shareholders have been the chief beneficiaries of the company's performance, an occurrence which is probably not as frequent as one would expect.
While I still think the world of this management team, I sold my shares because I no longer see a margin of safety in the price. Mr. Market's sentiment appears to have turned positive on this company, which is my signal to look elsewhere!
Disclosure: No position
Guru Discussed: Jim Chanos: Current Portfolio, Stock Picks
Stocks Discussed: GME, BBY, WMT, EBAY, RSH,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.