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Will GameStop (GME) Prove to Be an Appropriate Value Pick?
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Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put GameStop Corp. (GME - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, GameStop has a trailing twelve months PE ratio of 6.11. This level compares considerably favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.92.
If we focus on the long-term trend of the stock the current level puts GameStop’s current PE near its lowest levels, with the number having been in a downward trend since late 2015. Hence, we could infer that the stock is undervalued in this respect, especially in light of its historical trend. Thus, the present level seems to be a suitable entry point for the stock from a PE perspective.
Delving deeper into the PE’s inputs, we observed that the reason behind the rapidly falling PE figure since late 2015 is the company’s stock price movement. While earnings have remained somewhat stable, price has been trending downwards lately. However, we believe that with a resurrection in earnings growth trajectory in 2017, price will eventually appreciate to reflect the same.
Further, the stock’s PE also compares widely favorably with the Zacks classified Retail and Wholesale sector’s trailing twelve months PE ratio, which stands at 25.19. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, GameStop has historically always traded at a PE less than that of the sector’s over the observed term.
PS Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, GameStop has a P/S ratio of about 0.27. This is lower than the Zacks categorized Retail and Wholesale sector’s average, which comes in at 0.86 right now. In fact, the figure has been consistently lower than that of the sector since 2014.
Also, as we can see in the chart above, this is among the lows for this stock in particular over the past few years. This clearly suggests some level of undervalued trading for GME—at least compared to historical norms.
Broad Value Outlook
In aggregate, GameStop currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes GameStop a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for GameStop is just 0.55, a level that is far lower than the sector average of 1.60. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, GME is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though GameStop might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘C’. This gives GME a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, GameStop seems to have pretty striking prospects.
However, the company’s recent earnings estimates have been trending downwards. The current quarter has seen no estimates go higher in the past sixty days compared to four lower, while the full year estimate has seen three upward revisions and three downward revisions in the same time period.
This has had a small impact on the consensus estimate though, as the current quarter consensus estimate has declined by 1.3% in the past two months, while the full year estimate has inched lower by 0.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This negative trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Bottom Line
GameStop is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front.
The company forms a part of the Zacks classified Retail - Consumer Electronics industry which has a formidable industry rank (among the Top 9% out of more than 250 industries). Moreover, the company’s foray into the collectibles and licensed merchandising category and technology brands has been profitable. Additionally, its venture into digital, iDevice and gaming tablet businesses could be accretive to its results.
Furthermore, over the past year, the Zacks categorized Retail - Consumer Electronics industry has clearly outperformed the broader market, as you can see below:
However, given the negative trend in earnings estimate revisions, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>
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Will GameStop (GME) Prove to Be an Appropriate Value Pick?
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put GameStop Corp. (GME - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, GameStop has a trailing twelve months PE ratio of 6.11. This level compares considerably favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.92.
If we focus on the long-term trend of the stock the current level puts GameStop’s current PE near its lowest levels, with the number having been in a downward trend since late 2015. Hence, we could infer that the stock is undervalued in this respect, especially in light of its historical trend. Thus, the present level seems to be a suitable entry point for the stock from a PE perspective.
Delving deeper into the PE’s inputs, we observed that the reason behind the rapidly falling PE figure since late 2015 is the company’s stock price movement. While earnings have remained somewhat stable, price has been trending downwards lately. However, we believe that with a resurrection in earnings growth trajectory in 2017, price will eventually appreciate to reflect the same.
Further, the stock’s PE also compares widely favorably with the Zacks classified Retail and Wholesale sector’s trailing twelve months PE ratio, which stands at 25.19. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, GameStop has historically always traded at a PE less than that of the sector’s over the observed term.
PS Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, GameStop has a P/S ratio of about 0.27. This is lower than the Zacks categorized Retail and Wholesale sector’s average, which comes in at 0.86 right now. In fact, the figure has been consistently lower than that of the sector since 2014.
Also, as we can see in the chart above, this is among the lows for this stock in particular over the past few years. This clearly suggests some level of undervalued trading for GME—at least compared to historical norms.
Broad Value Outlook
In aggregate, GameStop currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes GameStop a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for GameStop is just 0.55, a level that is far lower than the sector average of 1.60. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, GME is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though GameStop might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘C’. This gives GME a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, GameStop seems to have pretty striking prospects.
However, the company’s recent earnings estimates have been trending downwards. The current quarter has seen no estimates go higher in the past sixty days compared to four lower, while the full year estimate has seen three upward revisions and three downward revisions in the same time period.
This has had a small impact on the consensus estimate though, as the current quarter consensus estimate has declined by 1.3% in the past two months, while the full year estimate has inched lower by 0.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Gamestop Corporation Price and Consensus
Gamestop Corporation Price and Consensus | Gamestop Corporation Quote
This negative trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Bottom Line
GameStop is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front.
The company forms a part of the Zacks classified Retail - Consumer Electronics industry which has a formidable industry rank (among the Top 9% out of more than 250 industries). Moreover, the company’s foray into the collectibles and licensed merchandising category and technology brands has been profitable. Additionally, its venture into digital, iDevice and gaming tablet businesses could be accretive to its results.
Furthermore, over the past year, the Zacks categorized Retail - Consumer Electronics industry has clearly outperformed the broader market, as you can see below:
However, given the negative trend in earnings estimate revisions, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>