Interesting findings here… Good companies should be given a nice premium to bad companies no doubt, as Future cash flows is a better way to value them than is book value or even PE ratios… I have no comment on GME although I do think that BAMM is very shareholder friendly, paying out massive dividends over the years — the stock is in a horribly hated industry has managed to reward investors year in year out. Peter Lynch used to love finding great companies in bad industries as they can gain market share when competitors die off. I am not saying this will continue but that it is nice when your bad company has shareholder and not stakeholder interests in mind. This may make the counter worker attitude theory sound a little less plausable but I agree with Parker that a good company needs happy or at least honest employees — it is hard to reduce shrinkage when you underpay people, and also it is not good business. For my dollar I would rather pay one guy a bunch of money than 3 guys minimum wage in a retail environment due to shrinkage concerns, but no matter what today’s ultra competitive retail environment makes life tough for managers, investors, and workers. This is an interesting article for me as I was involved in the stock of Hastings Entertainment very heavily as a percentage of my holding in 2008. When the stock went from $10 to $1 part of me panicked, but I managed to step away from my “brain” as described in “the power of now” and sold a very statistically cheap company to add to my investment in Hastings, which is a really cool place to shop and at the time traded for 3X-4X 2007 earnings, 1X operating cash flow, and just 35% of book value. Its hard to stomache doubling down on a movie rental, book, music, and video game chain no matter how low the price to book value may seem, but for me it may have saved me my job — today the stock is at $7.5 and I sold half of my position between $7.5 and $9 (it hit $9 per share in April)… As Parker has detailed on his blog, I had a very difficult 2008. BTW Parker as to my DUI you mentioned on your blog, which was funny, I read today that alchohol consumption helps one live longer! Cheers.

This is what i found.

When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a “person” for the purposes of this subsection.

where a “person” is defined as the following in section 3(a)(9)

The term “person” means a natural person, company, government, or political subdivision, agency, or instrumentality of a government.

Hope that helps.

Never came across that before. Don’t understand it, so I’ll pass and keep looking elsewhere.

Cheers.

The market has now priced GME as having 0% future growth rate and a gross margin reduction of 15%. I would be impressed with management if it managed to meet these expectations and very impressed indeed if they managed to exceed it. My assessment of GME’s true value is in the neighborhood of $9-10; I’d buy it at $5.

Did you guys see Best Buy is getting back into used games?

Any idea why? Didn’t they already try this? I know Wal*Mart did and I thought Best Buy already tried but couldn’t make it.

There are many data points to consider when doing research.
I’m not sure how many companies you invest in you’ve also been a customer of, but it seems like a potentially useful data point.

How to interpret or how much weight to assign to discretionary factors like this, is up to the investor.

@ Jae Jun – I’m not sure if this is an academic exercise, or if you plan an investment in GME. I was able to talk to Gamestop employees (obviously not the manager, who will have political reasons for not admitting shortcomings) fairly effectively because I looked and talked like them at the time (ie a young video-gaming slacker). I’m not sure your age, etc, but if you appear too ‘official’, or ‘business-like’, you may not get the same kind of open response.

Good luck, and keep blogging.

I dont think GME is a perfect company, but I do believe an opportunity exists. I’m not a buy and hold forever investor so whether the company will be around 10 years or more doesn’t affect my decision.

As for value, the definition is very broad. The price of a security will determine the value. A great company with high growth and awesome fundamentals could be considered the polar opposite of value if it is expensive.

On the other hand, value also exists in bankrupt companies where there may be no quality, growth, owner earnings. Maybe assets is the only thing that exists but that doesn’t mean value does not exist.

I doubt Gamestop has a future, frankly; it looks to be in very much the same competitive situation as Blockbuster five years ago. It has no real way to defend itself from future competitive threats (Walmart, Amazon, Best Buy, etc)or, as Ankit pointed out above, from the advent of online gaming. The price war last Christmas between WMT and GME was a sign of the future. That’s why backward-looking metrics such as average 5-year CFROI are dangerous in this case — the business model that underlay that profitability is likely under serious threat. There’s always a chance that GME could successfully adopt a Radioshack-type business model and preserve its profitability, but that would be, in my view, a gamble rather than a value investment.

A second, more general, thought: I’m not sure that I subscribe to a QVG model. Value is the outcome of the difference between quality and growth on the one hand (what the security is worth), and net assets + yield (CF yield or owner earnings yield) on the other (what the security costs). In other words Quality + Growth + Net Assets + Owner Earnings Yield = Value. Treating value as independent of quality and growth, at the same level of analysis as quality and growth, or as the discrepancy between recent high price and current price is likely, in my view, to lead to expensive mistakes.

In any case, thanks for your blog. I always learn something from my visits here.

This is from his 1979 interview with Forbes

“There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities;
that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a “better time” for equity investing are highly likely to maintain that posture until well into the next bull market.”

You made a lot of good points and I think there’s something that should be noted. As investors, we have to analyze the business, which you’ve done very well through observation, experiences, talking to customers, etc.

The thing we need to distinguish between is what the market says and what the business says. Business success does not mean investment success and business failure does not necessarily mean investment failure.

For example – you can have a crappy business turn out to be a great investment. Let’s say that a business is basically at break even operations, has $10 Million in the bank, and customers hate it, but they don’t have a better choice. There is no debt and not even any payables. While at break even operations, the total stock outstanding sells for $25 million and based on your experience, there’s no prospect for anyone to buy it out at a higher price. Okay, the stock is overvalued. Things deteriorate though and the market values the same stock at $2.5 Million and they have $9 Million in the bank. They began losing money and that drove the fear.

For $2.5M, with approval, you can buy out the company, immediately liquidate just the cash alone, and make a quick $6.5 Million. When companies sell below liquidation value, no matter how crappy they are, there are opportunities for certain investors. You can argue that the markets are forward looking and so they factor in future losses, and so when that forward looking factor becomes too much and you can make $6.5 Million from buying a company, it becomes well worth it to buy that crappy business.

Business risk and market risk are very different and so the cheaper the ownership, all else equal, the less risk. As investors, we need to identify opportunities where we want to make money, and often times it leads us to “cigar butts” as Ben Graham would call them. Wall Street pays a large premium to be able to buy good companies because people see them doing good things and automatically assume it will also be a great investment.

The investment is only good at certain prices, and so when investors say that they invested in Twitter or Facebook as a way to show off their skills, the real question is at what price

Next time I’m around GME, I’ll stop by and ask a few things or so.

GME does look cheap, but as a rule, I will never invest in a company whose service I know to be bad through personal experience.

Gamestop rips off their customers and offers pennies for trade in. I don’t know if you hang out with video-gamers, but most people would rather just give away unwanted video games, or let them collect dust rather than trade them in at Gamestop rates.

They also have an unusually restrictive returns policy, which is bad service and can cause resentment.

Gamestop under-pays their employees, and they get what they pay for, which is bored, uninterested drones looking for the first way out. Seriously, go to a Gamestop and strike up a conversation with an employee. They will be happy to tell you how messed up their business is.

Gamestop also seems incompetently run from a technological standpoint. My local store was still using dial-up internet in 2008. And this is for a company catering to young, high-tech consumers! I haven’t asked them since, so I have to assume they eventually upgraded.

I am speaking from experience with maybe 4 or 5 locations, all in Georgia (and of course an investor can still profit from an investment in a poor company), but I just wanted to throw in my 2 cents. Gamestop does not have a reputation for excellence with their customers, but is rather approached with mild resentment.

Ideally, with that setup, I wouldn’t need to “time” any of my purchases as long as my picks are well researched and done with a strict discipline.

But you do need to prepare a watch list and filter it out to the best opportunities and pounce when you get the chance.

Zehua

The question is how long?

Online social games are gaining popularity on places such as facebook and other social networks but these people are the types that won’t play a playstation or xbox to begin with.

There will always be hardcore gamers and Ankit correctly states that gamers need an aftermarket. It’s why GME has done so well. Their used game revenues has been the biggest revenue driver.

Lots of possibilities on both sides of the argument, just a matter of which one plays out.

The challenge for that is the publishers will have less control, because if they get all their sales from one source, and that source wants to change pricing, they might be in a tough situation where they simply have to accept whatever is being offered. The other issue is that this kind of model kills the aftermarket, which some gamers consistently use.

It’s hard to say what will happen with Gamestop’s business model though, and that’s why I think the stock is priced the way it is.

A good parallel might be the music industry – however iTunes offers other benefits there like being able to pick and choose songs from an album rather than only being able to buy the entire album. Even with online music sales growing, people still buy physical media and rent physical media, but the demand is only going to end at some point. Why wouldn’t this happen with Gamestop as well?