Additional Trading Ideas:
In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:
Bearish ideas: GLW, SEE, M, NOV, DISH, HAS,
NEW BEARISH Plays
GameStop Corp. - GME - close: 32.01 change: -0.43
Stop Loss: 34.15
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on December -- at $---.--
Listed on December 10, 2015
Time Frame: 6 to 8 weeks
Option traders exit prior to January expiration
Average Daily Volume = 2.1 million
New Positions: Yes, see below
The future of video game purchases is digital downloads. That is why shares of GME have struggled the last couple of years. Their retail business model is in serious jeopardy.
GME is in the services sector. According to the company,
"GameStop Corp., a Fortune 500 and S&P 500 company headquartered in Grapevine, Texas, is a global, multichannel video game, consumer electronics and wireless services retailer. GameStop operates more than 6,800 stores across 14 countries. The company's consumer product network also includes www.gamestop.com; www.Kongregate.com, a leading browser-based game site; Game Informer® magazine, the world's leading print and digital video game publication and the recently acquired Geeknet, Inc., parent company of ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products. In addition, our Technology Brands segment includes Simply Mac and Spring Mobile stores. Simply Mac, www.simplymac.com, operates 72 stores, selling the full line of Apple products, including laptops, tablets, and smartphones and offering Apple certified warranty and repair services. Spring Mobile, http://springmobile.com, sells post-paid AT&T services and wireless products through its 590 AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 69 Cricket branded stores in select markets in the U.S."
The company's earnings results have been mixed. Their Q2 report, announced on August 27th, came in better than expected. GME beat analysts' estimates on both the top and bottom line. Management raised their 2016 guidance. Guess what? Traders sold the news anyway.
Fast-forward to November. The stock has already reversed under major resistance near $48 again. Shares plunge on November 13th following an analyst downgrade. Ten days later GME reports their Q3 earnings results. Their profit was $0.54 a share. Not only is that 5% decline from a year ago but it's five cents below estimates. Revenues were down -3.6% to $2.02 billion, another miss. Hardware sales plunged -20% in the third quarter. Software sales were down -9%. GME's comparable store sales fell -1.1%, which was below guidance. If that wasn't enough management lowered their Q4 guidance below Wall Street estimates.
Following this Q3 report the stock garnered several analyst downgrades.
One of GME's biggest challenges is digital downloads where customers do not have to leave their home (or dorm room) to purchase new games. They can just purchase it online over the Internet and have it immediately downloaded and start gaming. Not only does this jeopardize GME's new game sales but it also hurts a major portion of their business, which is reselling used games. If fewer people are buying hard copy discs of their video games then that means fewer people selling their used games back to GME, which the company resells at a healthy margin.
The trend of digital downloads started years ago but they are growing in popularity. The bearish story on GME is not a secret. That's probably the biggest risk. There are already a lot of bears in the name. The most recent data listed short interest at 53% of the 103 million share float. That much short interest can make the stock volatile to any potentially positive headlines. I think the bears are right and GME is headed lower as their business continues to struggle.
Another risk is valuation. The stock has fallen -33% in the last few weeks. Most of the analyst action in GME has been bearish with several downgrades. The stock currently trades with a P/E around 8.6. Eventually some analyst firm might decide to upgrade it on a valuation basis and the stock could see a short-term rally on this sort of headline. Fortunately traders usually sell the rallies in GME.
Currently GME is flirting with a breakdown below major support in the $31.50-32.00 area. A breakdown here could see the current downtrend accelerate. The point & figure chart is bearish and forecasting at $19.00 target.
Tonight we are suggesting a trigger to open bearish positions at $31.40. Please note that this is an aggressive, higher-risk trade. GME can be a volatile stock. I am removing our normal entry point disclaimer regarding gap downs. Due to potential volatility traders may want to use the options instead of trying to short the stock. I am listing the January puts. You might want to consider the April puts (next available month).
Trigger @ $31.40
- Suggested Positions -
Short GME stock @ $31.40
- (or for more adventurous traders, try this option) -
Buy the JAN $30 PUT (GME160115P30) current ask $1.53
option price is a current quote and not a suggested entry price.
Option Format: symbol-year-month-day-call-strike