Action to Take
--> This
is surely a
deep-value
situation. Investor
patience is required
but investors are
simply too bearish
on a fairly bleak
situation.
GameStop (NYSE:
GME)
Some stocks deserve
a low P/E if their
sales and profits
are likely to keep
falling. That
appears to be the
case for GameStop.
For starters, video
game makers are
tired of seeing
their customers
spend money on used
games at places like
GameStop, as they
derive zero revenue
from those re-sales.
So they have begun
to release periodic
online updates of
hot games, in hopes
of securing more
revenue from each
title and
discouraging
consumers from
trading them in for
other titles. The
trend is already
underway in China,
and is just getting
started here in the
United States.
In addition, a
10,000 pound gorilla
just walked into the
neighborhood.
Best
Buy (NYSE: BBY) has
announced plans to
enter the market for
used video games.
You can bet they'll
aggressively price
used gaming titles
to quickly steal
customers away from
GameStop. GameStop
has few options but
to play the price
war game.
Analysts see the
company boosting
sales another +5%
this year, but
forecasts of further
growth in 2011
appear increasingly
unlikely even though
analysts still
assume GameStop can
keep growing. They
appear to be
ignoring those
above-cited factors.
That's why shares
trade for less than
10 times trailing
profits and around
seven times
consensus fiscal
(January) 2012
profits. Few believe
the consensus figure
will be reached,
otherwise shares
would be well
higher.
Action to Take
--> Wait
for some positive
news that pushes
shares back into the
$20s. The company
may announce a solid
quarter or benefit
from a fresh market
rally. This would
then set up a great
trade -- on the
short side.
Dean Foods (NYSE:
DF)
In a similar vein,
Dean Foods' low P/E
multiple shouldn't
entice investors. As
we wrote last month,
pricing pressures
are forcing profit
margins down to
historical lows for
this supplier of
dairy products to
supermarket chains.
We added that the
company's high debt
levels means massive
interest costs,
which saps many of
the profits the
company would hope
to keep.
Action to Take
--> In
early May, we
predicted that
shares had further
to fall. They've
actually risen +10%
since then, but
still look headed
for further
weakness.
Assurant (NYSE:
AIZ)
A low P/E ratio does
not ensure that a
stock will rise, but
when paired with a
very low
price-to-book value
ratio, it tells you
that shares are
being overly
discounted.
Assurant, which
provides insurance
policies in niche
areas like
disability, funeral
care expense and
after-warranty
protection for aging
cars, trades for
just eight times
trailing profits and
around 80% of
book value.
Assurant has taken
its shares of lumps.
The company was
heavily exposed to
the housing crisis
as it offered debt
and credit
protection to
consumers, only to
end up making big
payouts. But that
trend has abated and
results are on the
upswing. Profits
have rebounded,
bringing in more
cash for the
balance sheet
and pushing tangible
book value
ever-higher to a
recent $43 a share.
Action to Take
-->
Assuming shares
simply rise up to
book value, then
investors are
looking at a +20%
gain. Looking at it
another way, if
shares trade up to a
forward P/E of 10,
then shares would
reach about $48 --
more than +30% above
current levels.
