Lookback: RF Capital’s 2019 GameStop Corp (GME) Thesis

If you are looking for the best ideas for your portfolio you may want to consider some of RF Capital’s top stock picks. RF Capital, an investment management firm, is bullish on Gamestop Corp. (NYSE:GME) stock. In its Q3 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Gamestop Corp. (NYSE:GME) stock. Gamestop Corp. (NYSE:GME) is an electronics retail company.

In October 2019, RF Capital had released its Q3 2019 investor letter. The investment firm said that it bought Gamestop Corp. (NYSE:GME) in Q3 2019. The stock has posted a return of 132.3% in the trailing one year period, outperforming the S&P 500 Index which returned 15.1% in the same period. This suggests that the investment firm was right in its decision.

RF Capital fund posted a return of -6.98% in the third quarter of 2019, underperforming the S&P 500 Index which returned 1.87% in the same quarter. Let’s take a look at comments made by RF Capital about Gamestop Corp. (NYSE:GME) in the Q3 2019 investor letter.

“Gamestop is a video game retailer with over 5,700 stores across 14 countries. GME offers new and used video gaming consoles, video games (both physical and digital), accessories, collectibles, and other miscellaneous items. Customers are able to trade in consoles, games, and accessories for cash or store credit through GME’s buy-sell-trade program. GME also publishes Game Informer magazine.

The business is currently challenged due to the rise of digital downloads, competition from other retailers, and increased gaming on mobile and computers. Furthermore, earnings will continue to suffer until Q4 2020 because the industry is currently at the end of the console cycle. (Sony and Microsoft will be launching new consoles next year in Q4.) Although sales and earnings have been down significantly, at least we are seeing trough earnings or somewhere close to it.

Despite all the negative press around GME, we believe the situation looks worse than it actually is. The company has a strong balance sheet and continues to generate free cash flow. GME currently has $424 million in cash versus $418 million in long-term debt. Management has also projected adjusted diluted EPS of $1.15-$1.30 and adjusted FCF of $225-$250 million for 2019. Thus, GME should be able to stay afloat while waiting for the release of the next-gen consoles.

We made GME a 5% position. Our average cost was $5.30 per share. At this point, GME is difficult to value based on earnings. However, the strong balance sheet provides downside protection, and there will be more visibility when the new consoles and product titles launch next year. We will increase our position size if management continues to do the right things. The new CEO and CFO are off to a good start with 180-200 planned store closures and the completion of the modified Dutch auction tender offer for 12 million shares at $5.20 per share.”

Przemek Tokar / Shutterstock.com

In Q2 2020, the number of bullish hedge fund positions on Gamestop Corp. (NYSE:GME) stock increased by about 12% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Gamestop’s growth potential. Our calculations showed that Gamestop Corp. (NYSE:GME) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.