Is there a further bullish potential on the stock?


Company Background

Headquartered in Grapevine, Texas, GameStop Corp. is the largest video game retailer in the world.  The Company offers the best possible selection of new, as well as pre-owned video gaming consoles, video-game titles and other accessories in both physical and digital formats. GameStop has got a unique buy-sell-trade program that allows customers to trade video game consoles, games and other accessories, as well as other electronics. The Company has got a wide variety of channels where it sells different types of digital products, such as downloadable content, prepaid digital, network points card, prepaid subscription cards, as well as collectible products and digitally downloadable software.

Moreover, the company publishes Game Informer, which is the largest print and digital video game publication in the world that features reviews of new title releases, as well as game tips and different news about the current developments in the video game industry.

GameStop Corp. operates its business through more than 5,000 stores across 10 countries in four geographic segments: Unites States, Canada, Australia and Europe. 

The Company’s retail stores mainly operate under the GameStop, ThinkGeek, EB Games and Micromania-Zing brands.


GameStop’s financial performance

By looking at the financial statements of the company’s we shall say that GameStop has been having some tough times lately mainly caused by the coronavirus pandemic. The economic slowdown caused by the virus has had a bad impact on the company’s revenues and profits. We have therefore seen a massive decline on the company’s results and that has been one of the main reasons why the share price had dropped so much from the $60 highs in 2014 to the $15 lows in early 2021. Due to the economic slowdown all across the globe, GameStop has been reporting a loss on its net income over the past 3 quarters since April 2020. The company is reporting its 4th quarter 2020 results on the 25th of March and the earnings expectations are for $1.46 per share, while the company delivered $1.27 per share in the same quarter last year. In other words, analysts are expecting that the company has grown its revenues and managed to make a profit in the past 3 months of 2020. In case GameStop reports better than expected results for the last quarter of 2020 that would be very positive for the future share price performance as traders and investors have been waiting for such great news from the company for almost a year now. Thus, such a report could represent a great buying opportunity and we would be closely following the company’s performance and looking for buying opportunities at a decent discount, which would give us a chance to maximize our profitability to the upside.


GameStop’s short squeeze

If you are an active investor or trader and follow the news on a daily basis, we are sure you have read about the short squeeze that occurred on GameStop’s stock on the 28th of January this year. On that day, a short squeeze took place on GME, as well as on a few other major securities, causing huge financial consequences for certain hedge funds, leading to large losses for short sellers.
What happened on that day was that there were lots of selling orders on GME stock by some of the biggest financial institutions out there, as well as many other individual investors and traders who were trying to push the stock lower. However, a group of market participants on the Internet forum Reddit, called “wallstreetbets” decided to initiate that short squeeze and caused the price to bounce by a collective buying, which led to an immediate rise on the stock. Then, those investors and institutions that were holding short (sell) positions needed to buy back the stock to limit any further losses against them. That caused an immediate spike on the price that sent it to the $500 highs, nearly 30 times higher than the $17 lows in early January. Logically speaking, after such a massive rally to the upside, investors and traders started taking profits and that led to a huge sell-off on the stock, which caused a massive depreciation towards the current levels at only just above $50 a share.


Technical analysis

By looking at the chart, one could easily see the massive bullish rally that took place on the 28th of January, sending the price from $145 to $480, caused by the short-squeeze caused by a group of people on the Reddit community. Now, the organized buying activity back then had a goal to hurt Wall Street’s biggest players, such as hedge funds and other huge financial institutions betting against the company by short selling its stock and trying to push it lower. Once that huge buying activity started, those huge financial institutions saw their sell positions lose a significant amount of money and the price started hitting their stop losses. In other words, when one has got a short position on an instrument and the price hits their stop loss it means they are practically buying back that stock to prevent themselves from losing more money. That by itself pushes the price even higher. That’s the summary of what happened in the end of January. It was only logical that after such a massive surge to the upside and the price practically tripling its value in a day, we could expect a massive sell-off based on a profit-taking interest afterwards. Well, that’s exactly what happened and the price started falling off a cliff. It only took around a week and the stock was trading at the $52 lows already on the 4th of February to drop a bit more towards the current levels at around $50-$51.

The daily chart clearly shows the strong psychological support at the round number at $50 where lots of buying pressure has been taking place in the past and we have seen the price bounce from that level on a few different occasions. Moreover, the technical indicators such as RSI and MACD have almost reached the oversold mark, while the price has already touched the lower Bollinger band mark, giving further bullish indications. In fact, the stock market is extremely bullish at the moment and even though the company’s financials have been badly hurt lately mainly due to the coronavirus, we believe the recent correction that occurred on the GME stock could be giving us a good buying opportunity at a huge discount now after the massive rally that took place in the end of January. Thus, by buying at those low levels we would be able to make high profits to the upside.


Chart: GameStop Corp. (GME)

As you know, we at Dow Experts always include both fundamental and technical factors in our analyses as we believe they are key metrics for the overall performance of the instruments we analyze. Moreover, before we take an action and buy the stock we are analyzing, we evaluate the performance of the biggest ETFs out there in which the company we analyze plays a major role. In other words, we use our cross-sector correlation analysis in order to find out whether there is a similarity between the price-action trade of the current stock we are evaluating and if there is a confirmation by certain ETFs that have invested in the particular stock.

Only if there is a clear confirmation between the ETFs and indices we use for our top-down approach then we can confirm whether it is a good idea to enter the market at the current price or it could be better to be patient and wait for a better entry level at a better price. It is important to mention that entry and exit levels are among the most important factors that determine a trader or an investor’s success on the market.

The iShares Micro-Cap ETF (IWC) is concentrated on a market-cap-weighted index of micro-cap stocks in the US, selecting the smallest 1000 stocks in the Russell 2000 index.

The fund actually puts a lot of weight on small-cap companies. The Beta of the fund indicates that the IWC relatively volatile compared to the broad micro-cap market in the US. Yet, it provides a decent coverage of the companies within that sector. Moreover, the fund offers relatively low holdings costs in relation to its peers and makes it an attractive one to choose.

In fact, the IWC invests in many sectors of the business, such as Healthcare (27%), Financials (22%), Technology (14%), Consumer Cyclicals (14%), Industrials (10%), Energy (4%) and others.

GameStop Corp. plays a pretty decent role within the index with its current 0.65% weight and is among the Fund’s top 10 holdings.

By looking at the chart, we shall say that the IWC has been following the overall bullish market in the past 11 months after the market bottomed out in March. In fact, the daily chart clearly shows that the price bottomed out from the lows at $55 on the 16th of March after the huge sell-off caused by the coronavirus between the 2nd part of February and the middle of March and has been very bullish ever since. It has almost tripled in value since then actually, rising from $55 back then to $155 on the 8th of February this year. Most of the US stocks that IWC follows have been in a massive uptrend in the past year and that has helped the index perform very well, making very high profits for its shareholders to the upside.

The price is extremely overbought after that massive bullish rally. So, there might be a short-term profit-taking correction before another strong upside movement follows on the IWC. A little correction would give a chance for investors to start buying at a discount and be able to maximize their profitability on the way up.

It is clear that the latest as well as longer-term performance of the IWC confirms by far our bullish stance on the GME stock.


Chart: IWC

In order to make a final decision whether it would be reasonable to buy PFE close to the current levels, we have decided to also look at the biggest ETF out there – the SPY, due to the fact that the correlation between the IWC and SPY is 65%. In case the SPY confirms our bullish stance on the stock only then we would be willing to add GameStop stock (GME) to our portfolio.

By looking at the daily chart, one could easily see the massive bullish rally that has occurred on the SPY in the past year. Since the market bottomed out in the 2nd part of March 2020, we have seen a huge bullish rally on the SPY. It bounced from the $218 lows on the 20th of March to break a few key resistance levels to the upside, such as the $285, $300 and $350 to reach the current highs at $390. Many investors and traders are wondering how is it possible that the stock market was so bullish in the past year even during the pandemic times and the economic slowdown that followed. Well, that’s a good question.
In fact, while many businesses have been and still are struggling because of the virus, if we look at the leading companies out there, we shall say that we have been analyzing their financial performance thoroughly and they have been reporting some very solid figures and have managed to perform quite well even during the pandemic and that’s the reason the stock market in the US has been so bullish in the past year. Moreover, the recent news about the vaccine as well as the new President of the United States Joe Biden have been giving even more boost to the market and that’s why it is still trading very high even during those tough times we are finding ourselves in at the moment.

Actually, the huge uptrend that has been taking place on the SPY has been motivating investors and traders to buy all the dips and once there is a bit of a profit-taking correction to the downside, market participants have been taking advantage of buying at those discounts at a strong support mark and pushing the price higher afterwards – an example for a clear uptrend going in the past year.

We remain bullish on the SPY and don’t see a specific reason for a clear market turnaround soon. In other words, we believe the market would continue rising at least in the short to middle term.


Chart: SPY



Conclusion

As you know, we at Dow Experts enjoy analyzing different companies and investment opportunities. Therefore, we follow all the great market events, political and economic factors and reports, as well as companies coming up with their new products, as well as any other key factors that have an impact on different price movements on a daily, weekly and monthly basis.

Today’s analysis was focused on the so famous stock lately – GameStop Corp. (GME), which everyone talked about in the end of January 2021.

We shall say the company is not in its best financial performance and that’s a fact. Yet, the recent correction is giving us a great opportunity to start buying at a huge discount and therefore be able to make high profits to the upside. Sometimes bad news is good news for the market and buying so low might be an amazing opportunity for our followers to make high profits on the way up.

In order to further confirm our bullish stance on the GME, we have analyzed the recent performance of the leading IWC, where GameStop is among the top 10 holdings of the ETF. We also looked at the recent performance of the biggest ETF out there (SPY) where the correlation with the IWC is 65%.

Overall, the recent performance of both the IWC and the SPY clearly confirms our bullish expectations for the GME stock and we have decided to add it to our portfolio.

We would start buying the GME stock at the first key support mark at $50 where a lot of buying pressure is expected. Should the price drop further we would be interested in adding more to our long positions at around $40-$45 that would give us a chance to improve our average cost basis and further maximize our profitability to the upside. On the way up, we would be looking to collect some of our profits at around $62-$65, followed by the longer-term target at $80-$100 where we would be closing all our buy positions and wait for another pullback that would give us a chance to buy the stock at a decent support level again.




Sincerely,

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