History Looks Favorably Upon GameStop For March And April

Feb.28.12 | About: GameStop Corp. (GME)

Three years ago, in December of 2009, we heard a trader at Goldman Sachs say that he had just bought Continental Airlines (CAL). The reasoning? The stock had fallen 45% and every time the stock had fallen 45% in the past 15 years it proceeded to rally 30% over the next few months.

That was it. That was the only explanation for his trade.

Wondering if this trading idea would pay off, we proceeded to watch Continental Airlines, and sure enough, it proceeded to rally over the following months.

It was proof of the age old adage, "history repeats itself," and proof that there are times when betting on historical trends can pay off. And so, if history does repeat itself, we see purchasing shares in GameStop Corporation (NYSE:GME) a good play for March and April.

Historical Trend

Nine out of the past ten years GameStop has posted positive gains from the end of February to the end of March and positive gains eight out of 10 years through the end of April. Below is a table showing the prices for the end of each month over the past 3 years, as well as the gain/loss if the stock had been purchased at the closing price on the last day of February and sold on the last day of either March or April. There was opportunity each year for even higher gains if the stock had been sold at the monthly highs.

Year Month Ending Price Gain/Loss through March Gain/Loss through April
2002 28-Feb $9.55 31-Mar $10.10 30-Apr $9.53 6% -0.30%
2003 28-Feb $5.25 31-Mar $6.00 30-Apr $5.98 14% 13.81%
2004 29-Feb $9.33 31-Mar $9.01 30-Apr $8.80 -3% -6%
2005 28-Feb $9.71 31-Mar $11.08 30-Apr $12.31 14% 26.79%
2006 28-Feb $20.02 31-Mar $23.57 30-Apr $23.60 18% 17.91%
2007 28-Feb $26.19 31-Mar $32.57 30-Apr $33.17 24% 26.65%
2008 29-Feb $42.36 31-Mar $51.71 30-Apr $55.04 22% 29.93%
2009 28-Feb $26.92 31-Mar $28.02 30-Apr $30.16 4% 12.04%
2010 28-Feb $17.20 31-Mar $21.91 30-Apr $24.31 27% 41.34%
2011 28-Feb $19.95 31-Mar $22.52 30-Apr $25.68 13% 28.72%
Average: 14% 19%
Click to enlarge

Short Interest: The current short interest of GME is 43.63 million shares out of 122.26 million shares, meaning 35.68% of the available float is sold short. Based of an average 3.25 million shares traded each day, the short interest ratio is 12.50 days, meaning any good news that causes a short squeeze will likely pump the stock and return a quick profit.

Risks

Obviously the risks inherent with shares of GameStop are considerable. GameStop Corp. has made moves to bolster its business by providing ways for its customers to download content from its website, but is still highly reliant on used game sales for revenue. This revenue stream may not exist in the future, depending on the drift of the overall marketplace. Regardless of the long-term prospects, we see an opportunity to make significant gains in the next 60 days. Bloomberg has an average price target of $29.09 from 16 analysts surveyed, indicating a perceived upside of 27.5% from its current price of $22.73.

Important Dates

GameStop recently announced a cash dividend to shareholders in an attempt to show stability in the company and earnings model. The stock immediately spiked to $25.51 before coming back down to its current levels. Earnings are set for March 15, 2012 so there may be a run up in the stock price before earnings if shorts decide the risk is too great to hold through earnings. Additionally, if earnings surprise to the upside and management unveils some information bolstering the future prospects of the company, the stock may see a large move upward.

We have held shares in GME for March for the past 4 years, and will likely open a position in the next 72 hours.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GME over the next 72 hours.