Falling in love with a stock is one of the most common mistakes made by retail investors. What your emotions tell you to do and what you should do are two different things – disciplined, unemotional selling is critical to success. Another common blunder is to place too much faith in a management team and, as a result, expect them to be able to buck awful trading conditions in a highly competitive market. Right now, I think investors are making both of these mistakes with Game Group.
Game Group (LSE:GMG), rated a BUY by KBC Peel Hunt
Since its acquisition of GameStation in 2007, Game has been Europe’s biggest specialist retailer of computer and video games. It has 1,229 stores and plans to open 60 more before Christmas. Last week, in a bullish trading statement, the company reported like-for-like sales rising 24.8% for the 22 weeks to the end of June. These were driven by what CEO Lisa Morgan described as an “unprecedented number of triple-A software launches, such as Mario Kart and Wii Fit – all in a period that would normally be a quiet time in our industry”.
Clearly this was an impressive performance, but will it continue? The bulls seem to delude themselves that even in a recession punters will keep buying in droves. Clearly, an evening playing on the video console is cheaper than going to a cinema or pub, but still, in this cut-throat retail environment (presently seeing more high-street casualties than you get in top combat game Grand Theft Auto IV), how can Game keep bucking the trend? Add in the fact that PC games are by nature cyclical, and that Game appears to be at – or very near – the top of its cycle and I just don’t think cash-strapped families will continue to pile into its shops, even as they slash all their discretionary spending.
It also seems an odd choice to keep opening expensive new shops at a time when CDs, DVDs, books and even software are increasingly being bought online. Downloading games is not currently as popular as downloading music, as file sizes are larger for games. However, as broadband speeds improve and more compression software is used, there’s no reason why this shouldn’t change. And if it does, Game will be left on the shelf with a large fixed-cost base generating steadily lower revenues. And this will happen just as competition hots up, with traditional retailers being joined in this market by the likes of Amazon, Play.com, supermarkets and Ebay. It’s not a pretty picture.
The City expects sales and underlying earnings per share of £1.7bn and 20.7p respectively for this year, flattening off to £1.8bn and 12.6p in 2009. Hence the stock trades on forward p/e multiples of 12 – that’s too high in light of the challenges ahead. To my mind, after a tripling of the share price over the past two years, it’s time for loyal shareholders to bank some gains, as existing growth looks unsustainable.
Recommendation: SELL at 253p
• Paul Hill also runs a share-tipping service, Precision Guided Investments.