Discouraging GameStop (GME) earnings, r / WallStreetBets traders buy the plunge

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GameStop’s GME, the prodigal son of retail stocks amid the retail apocalypse, saw its stock drop 10% Thursday morning after a rather disappointing earnings call the night before. GameStop missed EPS ratings by a mile, but the biggest disappointment was its lack of guidance regarding its ostensibly ambiguous “transformation” plan.

However, this rational morning low was quickly redeemed by the seemingly irrational cohort of r / wallstreetbets (WSB) traders (although they used their 50-day moving average, which has become a technical support level). This group of nostalgic traders moving in the market has pushed GameStop up thousands of percentage points this year, allowing the company to raise more than a billion in cash through seasoned stock offerings. However, for now, it looks like the company has a hole in its pocket, with an inability to generate profits with its current business model and no direction on a new approach.

Ryan Cohen, the “visionary” activist investor who aspires to restore growth to the archaic retailer, has yet to show investors how he plans to do so. Without a plan in place, GameStop may run out of money before an operational change can even be made. I would avoid this gaming device.

Purchase value

On the flip side, Best Buy BBY had a strong July quarter, blasting analyst estimates and showing another record set of second quarter results. Best Buy consolidated its control of the consumer electronics market in the retail space amid the pandemic, as its smaller (less liquid) competitors abandoned the market.

Best Buy has demonstrated excellent operational efficiency over the past 12 months with double-digit sales growth translating into expanding margins to even more significant profit growth. BBY has just posted its largest operating margins in the stock’s more than 20-year history, with omnichannel digital options shaping up to be a powerful driver of profit. As the world moved away, there was a significant amount of demand pulled forward. Yet the growing consumer penchant for the latest technology will continue to fuel this leading consumer electronics retailer through the Roaring Twenties.

BBY represents a great value buy after more than a year of sideways trading, which has compressed its valuation multiples (earnings appreciating as the share price stays the same). Its current forward P / E stands at 11.5x, which is significantly lower than its industry average and its 5-year average of 19.9x and 13.5x, respectively. BBY’s recent trade crisis offers it attractive upside potential.

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