24/3/2017 Was The First Time I Bought GameStop: About Time a Private Equity Firm is Interested in it!
Chris Lee Susanto, Started investing in Singapore and U.S. stock market utilizing value investing & options selling strategies when he was just 21 years old. He is 25 years old this year. In the year 2015 at just the age of 22, he established Re-ThinkWealth.com – a blog where he often shares USA based value investing insights and options strategies. He also guests blog in renowned U.S. fund focused investing websites such as Value Walk and Singapore investing sites such as The New Savvy, Investment Moats and Dollars and Sense. In 2017, he was invited to share his insights on the art of value investing for students from Strategos in NUS Tembusu College and on entrepreneurship and investment for a graduating Diploma in Business cohort at Singapore Polytechnic. In 2018, he was invited to be a mentor in the Youth Innovation Challenge organised by Singapore Management University (SMU) Institute of Innovation & Entrepreneurship. On top of that, he often conducts his own personal closed group sharing session for some of his students (usually free of charge). As of the end of quarter 1 of 2018, he manages a U.S. stocks six-figure portfolio making 18.21% annually (capital gains + dividends + options premiums) (tracked starting from 1 March 2015 on a quarterly basis). He runs the members-only RWOA.io VIM Club, learn more here.
19 June 2018
I wrote about GameStop (NYSE: GME) a total of 7 times in my blog so far:
- 12 May 2017 – GameStop Corp (NYSE: GME)– A Cigar Butt Investing Play
- 16 June 2017 – Options Selling Strategy – Wk 3 June 2017 (GameStop Inc (NYSE: GME)
- 9 November 2017 – Re-examining GameStop as a cigar butt stock investing opportunity
- 22 November 2017 – GameStop Q3 17 Earnings — Glad Going Against The Crowd Was Right
- 14 January 2018 – Is GameStop Doomed? I Visited Their Stores in NY to Find Out
- 29 March 2018 – Here’s My Thoughts on GameStop’s Q417 Earnings Results (Released 28/3/2018)
- 30 March 2018 – Good Result and Yet The Stock Fell 10+% – GameStop’s So Unloved
Purpose of This Article Today
The purpose of me writing down this article today is to reflect on and document the thought process that resulted in me to have first bought GME in March 2017.
Because the fact is that today, it is reported by Reuters that GME has received buyout interest and is holding talks with private equity firms about a potential transaction. Seems like Sycamore Partners – one of the PE firms that have expressed interest in GME agrees with my conclusion and analysis that GME is mispriced and is undervalued at current prices.
From the analysis, I will also forecast – based on Sycamore’s past behavior, what they might offer for GME and whether GME would accept it or not.
This reflection is important because it is not the first time that a stock of mine has received buyout interest – which is a good thing – so reflecting on the process to reach this outcome is important for me. I first bought Qualcomm in January 2017 and after that, Broadcom made an offer to buy over Qualcomm which ultimately was ended by President Trump executive order.
Coincidentally, I only hold two stocks now in my concentrated U.S. stocks portfolio – Qualcomm and GME – which has both received buyout interests. One was an official offer for Qualcomm, and currently is still an interest – and not a buyout offer yet as you can see from the image above depicted by the two green arrows.
What are the odds of that happening? Bought two stocks I have high-conviction in – which is currently the two largest holdings in my U.S. stocks portfolio made up over 70% of my holdings – and both have buyout interests.
Here are my key takeaways on why I bought and still holding GME:
I first bought GME when it was above $20 because I knew it was cheap relative to its fundamentals which took into account free cash flow generative ability and the over-pessimism the market has in the company. At their current expected free cash flow for 2018 of about $300 M, there is never a time in the last decade that their price went as low as it is today for GME. There is obviously over-pessimism in the market.
Despite the fact that it is in the retail gaming industry which counts a lot on making money via its pre-owned segment of the business and is hit badly by downloadables and microtransactions, I bought it because of the results of the company that does not show that gleam of an outlook like most people says.
Over time, I averaged down on GME because I learned from my past mistakes of not averaging down on MBT and Keppel Corporation that could have allowed me to make more gains when I am convicted in a stock.
Meanwhile while holding GME, I received good dividends of about 6-7% after tax and options premiums every now and then – through a couple of puts and calls. My average cost taking into account the dividends and options premiums I received should be about $15+.
I’ve always thought that investment is not about making money, it is about having the correct investment process – and the results will come – in time. For GME, a company that has 44.12M shares shorted over a total share of 101.87M, a short squeeze is underway with so much negativity in the company.
Many times, I’ve questioned myself if I am subconsciously looking for evidence to support me still holding GME despite it being to be as low as $12.20 in recent times.
A combination of factors like over-pessimism supported by good fundamentals based on my checklists and unprecedented opportunity to get a good CEO from outside to run GME replacing current interim CEO resulted in me sticking to my conviction of holding GME.
Some background about Sycamore Partners based on their website:
- It is a private equity firm specializing in retail and consumer investments
- It has more than $3.5 billion in capital under management
- Their strategy is to partner with management teams to improve the operating profitability and strategic value of their businesses
- Their current investments include Nine West and Coldwater Creek. You can see more here.
Based on a Wall Street Journal article in 2018, Sycamore Partners has been very successful in their investment in the retail sector and they made hundreds of millions of dollars in the struggling retail sector by buying brick-and-mortar chains.
As you can see from the image above, while the public has been running away from making retail deals, Sycamore made bigger bets in the sector. It bought Staples Inc. in September 2017 for $6.8 billion – the highest buyout figure in 2017 according to Dealogic.
Sycamore strategy is often to buy struggling retailers, selling off their most valuable pieces, cutting costs and using the savings to extract dividends. Their first fund, a $1 billion pool raised in 2012, returns 43% after fees as of the end of June 2017 according to fund documents revied by the WSJ.
“Sycamore is the best of the bunch in the retail sector,” said Craig Johnson, president of Customer Growth Partners, a retail research firm.
Here are what Sycamore tells its investors their portfolio companies are worth:
Sycamore main loss is in Nine West Holdings where it has written off their equity stake by nearly 88% to $13 million as of June 30. But their returns from the brands they split off and sold were more than four times as much as its losses from the Nine West write-downs.
Seems like Sycamore is a really good PE firm that is great at finding companies to buy over and unlock the value from them. Of course, this means that they only buy companies in which they find that the current price in the market is too low in order to generate returns for their investors.
I think that obviously, Sycamore is interested in GME because they see value in GME. That means that GME is undervalued and they would like to unlock the value from the company – probably from selling off some of its valuable assets and curring down costs further.
The key factor here is the board of directors decision on whether to accept some of these buyout offers or not. There is a high chance in my opinion that the BOD will accept an offer quite easily since most of them are of a quite an old age – as you can see from the image above – with the executive chairman Daniel already at 70 years old.
I am not expecting a high offer for GME, probably if there is one, it will be in the $18-$20 range – and the BOD would most likely accept it.
Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.
Disclosure: I own shares of and is long on Qualcomm (NASDAQ: QCOM) and GameStop (NYSE: GME).
Important: Please read our full disclaimer.
Thank you for your time reading.
The above image is how the new Re-ThinkWealth logo looks like. As you might have noticed, it is a combination of “R” and “W” which stands for Re-ThinkWealth. At the same time, the shape of the logo embodies the resemblance of how a stock market will behave. The stock market goes down and up […]read more
So basically, I knew that if I cannot beat the S&P 500 return over the long run, it’s better if I just invest in the S&P 500. While the S&P 500 practices in a huge diversification of 500 big companies listed in the U.S., my U.S. portfolio practices concentration of ideas in which I am most certain about […]read more
I am 25 years old this year and I am always fascinated by how a change in our thinking can result in a huge change in our wealth. I am convinced by the notion that how we think creates the wealth that we have. And writing has been an integral part of it all because it gives me an avenue to pen […]read more
Starbucks is a company that needs not much introduction. I am sure that most of us have drunk Starbucks coffee before. And many of us have studied or did some work or caught up with a friend there. Starbucks is a familiar company that is in almost every airport around the world. Their story though started back in Seattle […]read more
I do admit that a business is nothing without goals, hopes, and dreams. A successful business requires the founder to have a vision and to be able to turn that vision into reality. A successful business is one that has managed to turn hopes and dreams into reality. And by reality, I mean cash. Cold hard cash. Think Apple, […]read more
Qualcomm is the company that supplies phone makers like Samsung, Xiaomi, Huawei, Apple chips so that their phone can be a “smartphone.” Different chip suppliers will have different chips. And just by having a different chip, the performance of the phone can vary greatly. I am vested in Qualcomm since 24 January 2018 at an average price of about $53. Here are the […]read more
1. Soccer is very unpredictable – The ball is round. as of 28 of June 2018 in the qualifying round, Germany is out of the world cup. Who could have predicted that? Not UBS and Goldman Sachs, that’s for sure, who predicted Germany would win the cup and go to the final respectively. 2. The more the potential payout, the lesse […]read more
Sony is at an inflection point after years of restructuring. Having shed and restructured loss-making business units, it comfortably exceeded its 2014 medium-term plan to deliver an ROE of 10% and operating profit of JPY500bn in FY17. The company is seeing a number of tailwinds for games, music, and the semiconductor segments […]read more
Daniel Ek has built a great business with Spotify. Now that it has recently IPO-ed in 2018, is this digital music streaming service of his, invest-worthy? I am sure that by now you would most likely have heard of Spotify before. But I am sure that not many of you know that Spotify was founded and […]read more
But over time, I would like to invest in good businesses at a fair price instead of continuing to invest in an OK business at a cheap price. Due to Facebook’s recent drop in its share price, I took a stake in Facebook during the past few months and right now, it consists of about a quarter of my portfolio.read more
Before we touch on the limitations of Black-Scholes. let’s do a brief recap. In the first part of the article, we talked about how the Black-Scholes model is used to price options. They are commonly known as the options pricing model to know the fair price of the put or call options. There […]read more
The Black-Scholes model was first developed by three economists. Two of them – Myron Scholes and Robert Merton – received a Nobel prize in 1997 for their work in this model. The Black-Scholes model is also commonly known as the options pricing model. And as the name indicates […]read more