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Why Jim Chanos Shorted Gamestop

October 23, 2012 | About:
matsandalex

matsandalex

10 followers
In April 2012, Jim Chanos revealed some value traps that his firm has shorted. One of the firms that he has persistently cautioned investors about is Gamestop (GME).

Chanos' argument is that the video game retailer will face increasing competition from e-commerce. Similarly, companies like Best Buy (BBY) and Radio Shack (RSH) have struggled with online competition from Amazon.com (AMZN).

The key question is whether the anticipated slide in Gamestop's business has started. If it has, is the trend accelerating?

First of all, management expects the company to earn $3.10 in fiscal year 2012 which means that shares trade for 7 times earnings.

However, revenues are falling quickly. Sales of physical video games are down 20% year over year. New hardware sales declined 34% in the second quarter.

Bears should be careful because Gamestop is heavily shorted by the hedge fund community. Thirty-seven percent of the share float is short despite the fact that short-sellers are paying out 4% dividends.

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