Gamestop's No Win Situation

First, as I wrote in one of my comments earlier in response to a reader - I heard last night on one of the TV shows that the average stock is down 30% since October highs. So this market is much harder than the indexes sharp (but relatively modest) losses are showing. This essentially means small caps and mid caps are being shredded and the mega and large caps (which dominate the indexes, are holding up 'relatively' well - remember a lot of flight to safety stocks like a Procter & Gamble or Altria are mega caps)

Very tough sledding... Gamestop (GME)  is a great example. I have opined in the past that the last thing consumers will give us is electronics - whether it be gadgets, video games, etc. To show how hard it is to invest in any form of retail right now, all this company did was post a blow out quarter, raise guidance, perform... perform... perform... and the stock is down 5%. After dropping from $62 to $55 in the past week. Just treacherous out there, and anything within six degrees of any consumer is being shot.

If so many other names I like were not "on sale," I would be heading into Gamestop which is a de facto monopoly on video game retail sales... gamers will cut back on eating before they give up their games! But that doesn't matter in this type of market. This reminds me of Research in Motion (RIMM) - the stock just reported two weeks ago, provided great guidance and said they see no slowing. Not a week later, the stock is crushed on fears of slowing! Which means guidance is not even worthwhile after a week, because fears are so high out there. Toss out what the company said, literally 10 days ago, because the End of Days is approaching. This seems to be the approach.

I always find it interesting that investors want companies to beat earnings... if they don't beat them, they crush a stock... but when a company issues conservative guidance (that it knows it can beat), it still gets crushed. There is no winning and that's the part of earnings season I really hate. I love the "information acquisition" part; I hate the investor reaction part.

• GameStop Corp (GME), the largest U.S. video game retailer, raised its quarterly earnings estimate on Thursday after holiday season sales rose sharply on blockbuster games like "Guitar Hero."
• But shares of GameStop fell 6 percent even after the announcement as analysts, while bullish on the stock, cited concerns that video game sales could not maintain their momentum over the short term.
• "First of all, the numbers were lights out," said Mike Hickey, an analyst with Janco Partners Inc. "But the concern is that their same-store sales guidance was raised to 15.5 percent to 16.5 percent, which is measurably below the 20 percent they just produced for the holiday period." (notice the word raised... they raised guidance but since it was not as high as the holiday period its 'bad'. Don't people realize this is a retailer? Retailers have higher sales during the holiday period - hello?)
• "But I will say this is a conservative management team, and we continue to like the name. They appear to be doing all the right things."
• GameStop's comparable store sales for the holiday period increased 20 percent, while total store sales for the period rose 34.7 percent, it said. Given the rise, the retailer increased its fiscal fourth quarter 2007 comparable-store sales estimate from a range of 7 percent to 9 percent to a range of 15.5 percent to 16.5 percent. (last I checked, that was a good thing.... but apparently not anymore)
• GameStop also boosted its fourth-quarter diluted earnings per share estimate to a range of $1.09 to $1.10. Full-year earnings per diluted share are now estimated to be in a range of $1.75 to $1.76, or 13 cents per share higher than guidance issued in November. (not good enough... because video games may slow in 2014 - sell!)
• Another analyst, Arvind Bhatia of Sterne Agee, reiterated his buy rating on the stock and said the pullback marked a ripe time to buy shares. "We think even though the stock is down today on the 'sell on news phenomenon,' we were fundamentally more impressed after the release than before the release," Bhatia said. (sell the news? what have they been selling each day of the past week? sell the pre-news?)

And this is why this market is completely treacherous right now - logic does not apply, and good stocks are thrown out with bad. Stock picking is rather useless as 'baby bathwater' theory is now upon us. How long it lasts is the open question and if anyone has that crystal ball, drop me a line.  But when I see action like this, the contrarian in me wants to get very very long this market. Oh wait, already am...

Disclosure: Long Research in Motion in fund and in personal account