Options Trade – GameStop Corp. (NYSE:GME) Calls 
Monday, March 24, 2014

**OPTIONS TRADE: Buy the GME Jul 2014 40.000 call (GME140719C00040000) at or under $2.40, good for the day. Place a protective stop limit at $0.95 and a pre-determined sell at $4.00.

by Ian Harvey

March 24, 2014

Introduction

Video game retailer GameStop Corp. (NYSE: GME) will announce its fourth quarter numbers before the opening bell on March 27. It is expected to report FY 2013 fourth-quarter EPS of $1.96 on revenue of $3.79 billion, compared with a profit of $2.15 a share on revenue of $3.56 billion in the year-ago period. GameStop Corp. is trading at around $38.34 a share. In the past 12 months, the stock has gained 50.5 percent.

However, concern over the future of traditional, physical video games has brought weakness into the stock, which is currently down 23.0% year to date.

Company Details

GameStop Corp. is a U.S. video game and entertainment software retailer. Based in Grapevine, Texas, the company operates 6,700 stores throughout America and Europe. It is the main retailer and often the only choice for gamers of new and used games. Offering a wide variety of used titles, having good customer service, accepting most titles, and also giving the customer’s credit on new games for their used ones, the pre-owned games (used games) business has generated as much as half of the company’s gross profit.

Having a customer loyalty program (PowerUp Rewards), with more than 30 million users, the company ensured both its new and preowned gaming market, giving benefit to customers (usually young ones that use solely cash), and ensuring its market share against competitors such as Target or Wal-Mart. Though now the online retail store Amazon.com seems to be the most dangerous competition for GameStop.

Skepticism Rampant

GameStop could use a little good news. Wall Street is already skeptical over the future of the video game sector. Online gaming, in conjunction with smartphones and tablets pose a threat to the traditional video game industry, but it believed that the fears are a bit overblown. To make matters worse for GameStop, Wal-Mart (WMT) recently announced plans to begin its own used-game trade-in program, putting it in direct competition with GameStop's monopoly on the practice.

Initial reaction was negative towards GameStop's stock on the Wal-Mart news, but it can actually be viewed as a positive indicator that the used video game market is not as close to death as some might argue. GameStop has years of experience in the market, and Wal-Mart will have a tough time matching the company's expertise in being able to make the business model work.

GameStop has a 11.5 price-to-earnings ratio, and it 3.4% dividend yield, which combined, makes it attractive at the current time.

Positive Aspects

GameStop still has the youngsters’ market, which use cash only and are used to going to the nearby store to change their old games for new ones. This company still has an F-Score of 7, which indicates a healthy situation and coverage of all of its debt. Its dividend yield is also close to a one-year high.

Institutional Investors

Several institutional investors have been buying GME in the recent quarters. This is important because hedge funds use strict fundamental procedures before investing in a stock.

Analysts Opinions

Currently, many analysts have a good outlook for GameStop Corp. Analysts at MSN money are predicting that GameStop Corp will retrieve EPS of $3.04 for fiscal 2013 and an EPS of $3.78 for fiscal 2014.

Analysts at Bloomberg estimate GameStop Corp's revenue to reach $9.15 billion for fiscal 2013 and $9.85 billion for fiscal 2014.

On Nov. 22, 2013, Needham & Company gave GameStop Corp a rating of "Buy" with a target price of $50.60 (signifying significant upside potential from this point).

Conclusion

With the stock down so much in the year, an upbeat earnings report could send GME sharply higher. At the same time, even a disappointing report will likely not have too negative an impact on the stock since the valuation is already so low.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the GME Jul 2014 40.000 call (GME140719C00040000) at or under $2.40, good for the day. Place a protective stop limit at $0.95 and a pre-determined sell at $4.00.



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