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Video game retailer GameStop (NYSE: GME) would normally look forward to this time of year as the holiday season presents an increase in their business each year. Unfortunately, the stock dropped sharply on Nov. 13 and the final loss ended up being over 16%.
The sharp drop was brought on by an analyst downgrade and a retail sales report that showed weakness in the video game market. GameStop shares continued to decline after that day and it finally appears to be finding a little support just above the $32 level as evidenced by the daily low from Dec. 3-8 being between $32.19 and $32.50.
In addition to the four straight days where a new low wasn’t made, we see that the stock is in oversold territory based on both the 10-day RSI as well as the slow stochastic readings. The RSI hit the lowest level it has seen in the last two years back in mid-November and now appears to be headed out of oversold territory. The stochastic readings just made a bullish crossover and that too is encouraging. Another bullish driver in my opinion is the fact that the stock stabilized in the last two days while the overall market was down rather sharply.
The weekly chart is also encouraging as we see that the stock has found support in the $30.50 range in the past and this area should serve as support yet again. I highlighted the weekly stochastic readings because the pattern looks similar to what we saw late last year, right before the stock rallied over 40%.
The sentiment toward GameStop stock is bearish, with one indicator showing extreme pessimism. The analyst ratings are slightly bearish to neutral with eight “buy” ratings, five “hold” ratings and one “sell” rating, but it is the short interest ratio where we see the extreme bearish sentiment.
Normally I consider any short interest ratio above a 5.0 as an indication of bearish sentiment and GameStop’s short interest ratio is at 22.6 with 47.04 million shares sold short and an average daily trading volume of 2.08 million over the last three months.
What’s Next for GameStop Stock
Given the decline in the stock and the bearish sentiment, you would think that the company’s financial performance would look terrible, but in fact it hasn’t been that bad. Yes, the company missed on two of the last four earnings announcements, but it was by two cents and five cents.
The outlook is still pretty good, with growth projections for the current quarter of 5.1%, 7.4% for the next quarter, 8.6% for this year and 11.7% for next year. The company also pays a decent dividend, which at this point is yielding 4.32%.
I would look to buy GameStop stock up to as high as $34.50 with a stop loss at the $30 level. GameStop stock looks poised to go on another run as it did for the first 10 months of this year and that rally led to a 40% gain. I look for a similar return and holding period this time around.
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