Is Gamestop Short Interest Just Too High? (GME)

Gamestop Corporation (NYSE: GME) is still sitting in the same sort of No-Man’s Land position its chart has been in for some time.  With a $3.2 billion market cap, its $23.50 share price is in the middle of the 52-week range of $18.34 to $28.66.  On paper this is a value stock of serious proportion.  For investing history, it has actually been a value trap.

There is still a question to ask here… Does this stock just have too large of a short interest?  The most recent short interest showed a whopping 54,847,869 million shares in the short interest.  Not only is that over 23 days worth of trading volume, but it is the largest short interest that there has been in this issue for well over a year.

We are not going to run the valuations other than the forward P/E ratios.  The stock trades at 8-times trailing earnings and under 7.5-times the coming year’s expected earnings.  Dirt cheap.  The reason it is so cheap is because investors worry that digital downloads and the move to ‘freemium’ games will collapse this video game retailing giant. Will there be earnings warnings ahead?  Maybe, probably.  Investors do not generally short sell aggressively if they think earnings power is present.

Gamestop has been thrown around as a takeover stock for private equity before.  We have some issues with this, but nonetheless it has been mentioned numerous times in recent years.  Our take is the next video game console cycle upgrade that will act as a major catalyst.  That may be more than a year out, but when that happens it is likely to be a boom for this cheap stock.  Unfortunately, that coming event is still probably too far out to matter today.  When investors do get interested in that, it is hard to imagine that there will not be a short squeeze of a major size.

Over 54.8 million shares comes to over $1.2 billion worth of stock short.  The entire market cap is only $3.2 billion.  With over 136 million shares outstanding, this comes to a just over 40% of its float being short.

JON C. OGG