GameStop Stock Dropped from the S&P 500 Index

GameStop's removal from the benchmark index of the US stock market may not mean game over.

Asif Khan

April 19, 2016 3:30 PM

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S&P MidCap 400 constituent Global Payments Inc. (NYSE:GPN) will replace GameStop Corp. (NYSE:GME) in the S&P 500, Gamestop will replace Global Payments in the S&P MidCap 400. GameStop is ranked near the bottom of the S&P 500 and has a market capitalization of $3.3 Billion that is more representative of the mid-cap market space.

This is not necessarily a bad sign for GameStop's stock as it is trading at rather reasonable financial metrics. The company is valued at 1.74 times book value, at 8.7 P/E ( price to earnings multiple), and a forward P/E of 6.85 which is a discount to the company's expected earnings growth rate. The stock also pays a dividend yielding 4.66% annually with a payout ratio below 50%, meaning they have plenty of cashflow to continue to pay it in the foreseeable future. The stock and company may be hated by Wall Street and gamers alike, and that is reflected in its 42% short interest. That means that 4 out of 10 shares of stock outstanding has been borrowed and sold short in the interest of betting against the company.

I think GameStop is an interesting contrarian investment here. Many folks like to point to digital distribution as a major headwind to the company's used games model, but at the end of the day people still need a place to preorder Amiibo and console hardware. The company has also pivoted with their Simply Mac stores that focus on iPhone, iPad and everything else Apple. The death of GameStop has been widely publicized, but the company is still standing with a solid balance sheet. I would look at any pull back below $30/share as a fine opportunity to buy this fallen company with a solid dividend yield. I will readily admit that there are long term headwinds facing this company, but it all seems to be priced into its depresssed valuation.

Full disclosure:

Asif A. Khan, his family members, and/or his company Virtue LLC had the following position(s) at the time of this article:

Long GameStop

Glossary

Market Capitalization -  the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.

Price-to-Book Value - a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. 

Price-to-Earnings Multiple (P/E Ratio) - a ratio for valuing a company that measures its current share price relative to its per-share earnings. Forward P/E is calculated by dividing the current share price by the a company's expected future per-share earnings.

Earnings Growth Rate - the pace at which a company's earnings per share are growing year over year.

Dividend Yield - The amount a company's stock pays out per year in dollars divided by its share price.

Payout Ratio - the percentage of net income that a company pays out as dividends to common shareholders. 

Short Interest - The percent of outstanding shares of a company's stock that are being borrowed and sold short to bet on the company going down.

For more investment information like this I recommend checking out Investopedia.

Asif Khan

CEO/EIC/EIEIO

Asif Khan is the CEO, EIC, and majority shareholder of Shacknews. He began his career in video game journalism as a freelancer in 2001 for Tendobox.com. Asif is a CPA and was formerly an investment adviser representative. After much success in his own personal investments, he retired from his day job in financial services and is currently focused on new private investments. His favorite PC game of all time is Duke Nukem 3D, and he is an unapologetic fan of most things Nintendo. Asif first frequented the Shack when it was sCary's Shugashack to find all things Quake. When he is not immersed in investments or gaming he is a purveyor of fine electronic music. Asif also has an irrational love of Cleveland sports.