GameStop Corp. (GME) has had quite an interesting year so far, rising to fame (and new highs) after a group of Redditors decided to “stick it to the man” and bid up GME.
GameStop’s surge was a fascinating example of a “short squeeze.” Simply put, when traders “short” a stock, they borrow shares of the stock they think will fall over a given timeframe. If the stock drops, they give back the shares and collect the difference between the initial borrowed price and the actual sale price.
In a January Market360 article, I explained why I would not recommend GME to my subscribers. The reality was the fundamentals were weak, and the stock was simply too volatile to pass my fundamental screenings.
I also talked about the stock’s underwhelming fourth-quarter earnings back in March. Well, the company has just released second-quarter earnings, and I am once again not impressed.
After the market closed on Wednesday, GameStop, Inc. unveiled second-quarter results that fell short of analysts’ expectations. During the second quarter, revenue rose 26% year-over-year to $1.18 billion, 5.4% above consensus estimates for $1.12 billion. The company also reported an earnings loss of $0.76 per share, up 54% year-over-year, but still wider than analysts’ call for an earnings loss of $0.66. So, GME posted an 14.3% earnings miss.
Interestingly, the company is under new leadership and no longer sees itself as a retailer but rather a tech company. The new leadership claimed in the earnings meeting, “We are evolving from a video game retailer to a technology company that connects customers with games, entertainment and a wide assortment of products.”
However, company management did not expand any further on its new business model. Perhaps the only things GME has in common with start-up tech companies is that it has lost a significant amount of money this year and lacks strong fundamentals.
GME dropped 9% in early trading after its weak fundamentals were put on center stage. Interestingly, the stock did rebound slightly on Thursday, but it ultimately ended the week lower.
Now, no one can argue that GameStop is in a better position than a year ago, but the reality is the stock is too volatile, and it doesn’t pass my fundamental screens.
Yes, my Portfolio Grader does give the stock an A-rating for its Quantitative Grade, which represents the strong buying pressure the stock has been under. However, its fundamentals are quite poor. It holds an F-rating for Earnings Momentum and Analyst Earnings Revisions, a D-rating for Cash Flow and Return on Equity and a C-rating for Fundamentals and Sales Growth. Overall, its Fundamental Grade is a “C.”
In other words, the stock is a mixed bag and likely a bubble waiting to be pricked. Short covering should never be confused with real strength, which is why I also recommend that GameStop and other short squeezes be avoided.
Instead, I encourage investors to focus on fundamentally superior stocks. In order words, stocks with strong earnings and sales growth, which also describes my Growth Investor Buy Lists stocks to a “T.”
Take my Growth Investor stock, Restoration Hardware (RH) for example. While certainly not as flashy as GameStop is right now, the company offers luxury home furnishings, including furniture, rugs, lighting and textiles. RH is also in the process of expanding its brand to include RH Guesthouses and RH Residences, which enable folks to stay in private, luxury accommodations.
RH also unveiled record quarterly results on Wednesday afternoon. Second-quarter revenue jumped 39% year-over-year to $989 million, up from $709 million in the same quarter a year ago. Adjusted earnings surged 105% year-over-year to $252 million, or $8.48 per share, compared to $123 million, or $4.90 per share, in the second quarter of 2020. The analyst community was expecting adjusted earnings of $6.48 per share on $975.45 million in revenue, so RH crushed earnings estimates by 30.9% and posted a 1.4% revenue surprise.
Thanks to the strength of its business and continuing demand for its home furnishings, RH increased its outlook for fiscal year 2021. Full-year revenue is now forecast to grow between 31% and 33%, up from previous estimates for 25% to 30% annual revenue growth.
Company management also noted that it anticipates a “more long-term and sustainable step change in consumer spending on the home.” In other words, RH expects folks to continue to spend money on nesting at home and/or updating their homes. As a result, RH stated that “2022 is shaping up to be the most exciting year on record for the RH brand.”
While the stock holds a B-rating for its Total Grade, its overall fundamentals are clearly much stronger. The fantastic second-quarter earnings report sent the stock soaring over 8% on Thursday.
My Growth Investor Buy List is chock-full of stocks at the top of their respective sectors, like RH. This includes two stocks that have the potential to be some of the biggest winners of the shift to electric vehicles (EVs).
P.S. There is a great divide opening up in America – and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.
On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.
What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.
Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.
It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.
It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.
It’s free to watch, and by doing so, I know you’ll be ahead of everyone else struggling to understand what is really going on.
Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: