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GameStop stocks that could even suit Janet Yellen
April 1st, 2014 

Now that Federal Reserve Chairwoman Janet Yellen has gotten settled into her new role, have you wondered what her portfolio looks like?

She has more influence on the economy and Wall Street than probably anyone else in the world.

Obviously, she can’t do any stock trading, and she is limited from buying or selling securities during the seven days prior to the Fed’s Federal Open Market Committee.

She is also limited to holding a security no less than 30 days with the exception of a money market.

As far as what she holds in her portfolio, it is largely bonds, equity index funds and blue chip stocks. I was happy not to see any annuities. The value of her portfolio is estimated to be from $2.2 million to $4.9 million. She also listed a stamp collection valued from $15,000 to $50,000.

All assets are held in a family trust with her husband, George Akerlof, who is professor at Berkeley.

One stock the Fed chairwoman may want to consider is GameStop. While it’s not a blue chip company, the fundamentals look rather strong. GameStop is a large company with 6,600 stores in 15 countries and headquartered in Texas. It has been in business since 1994. The stock hit a high of $57.74 on Nov. 14, 2013, and currently trades at less than $40.

The company has a current PE of 11.1, well below the industry at 97.1. Price to sales, while I thought looked pretty good at 0.48, were still above the industry average of 0.19. The company does have some intangible assets on its balance sheet, which increases the price to book from 2.0 to 6.8, which is above the industry average of 2.2.

Price to cash flow looks OK at 7.7 but is still slightly higher than the industry at 6.9.

I was really shocked when I saw this company also pays a 3.5 percent dividend and only uses 33 percent of its earnings to pay out that dividend. I just didn’t think this would be such a high-dividend-paying stock.

There seems to be some difficulty in the sales, which could explain the recent stock decline. Sales were up only 0.15 year over year when the industry saw an 0.8 percent increase. Earnings, however, rose by 208 percent year over year, while the industry experienced a 135 percent climb. I do wonder about the future sales of video games, but then I look at the explosive sales of consoles from Xbox and PlayStation and realize gaming is still a big thing and growing. If one were to invest into this company, it would be important to understand its game plan going forward.

One can’t complain about the balance sheet. The company has no debt but the industry has a debt to equity of 27.3. If one wants to pick on the company for something, you could complain that its current ratio is on the low side at 1.1 when the industry is at 1.4. However, I’m OK with a company having a current ratio of about 1.0.

Return on equity is 18.6 percent well above the industry at 1.8. The net profit margin is very good as well, checking in at 4.4 percent compared with a very low industry rate of 0.20.

The efficiency of the company looks strong. The receivable turnover for the last 12 months is 129 times for the company -- well above the industry at 12.5 times. The inventory turnover would take some investigation as to why it is lower than the industry average of 6.9 when the company is only 3.7. If buying this company, be sure that the inventory is not rising faster than the sales.

Looking out to fiscal January 2016, the EPS based on the mean of 12 analysts is $4.57, up 22 percent from the January 2015 EPS of $3.76. Using the January 2016 EPS based on the current price of $39, the company only trades at 8.5 times earnings. Place a multiple of 16.5 on that $4.57 and one would be looking for a target sell price of $75.40, more than a 100 percent gain from current levels.

I will point out that 90 days ago, the January 2016 EPS was $4.80, but even using the analysts’ lowest estimate for January 2016 of $3.55 at 16.5 times EPS, the target price would be $58 per share, still a nice 49 percent gain -- and don’t forget about the 3.5 percent dividend.

Maybe if Janet Yellen sees this she will add it to her portfolio, blue chip or not.

Have a question or a company you'd like me to take a look at? Email me atbrent@wilseyassetmanagement.com.

 



Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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