GameStop Corp. (NYSE:GME) is facing a mixed bag of sentiment as the company prepares to release its fourth-quarter earnings report after the close of trading tomorrow afternoon. Fundamentally, GameStop faces some stiff year-over-year comparisons, but GME stock is poised for a breakout if the company can get investors to look past declines in hardware sales.
What’s more, such a breakout could garner additional fuel from heavy short covering.
Digging into the numbers, GameStop earnings are expected to come in at $2.16 per share, up 14% from the same quarter last year. Revenue, meanwhile, is seen declining 2% to $3.6 billion. The company is coming off strong hardware sales in the fourth quarter of 2013, with both Microsoft Corporation’s (NASDAQ:MSFT) Xbox One and Sony Corp (ADR)’s (NYSE:SNE) PlayStation 4 selling much better than analysts had expected.
However, software sales could make up a majority of this shortfall, with GameStop already announcing that holiday software sales were up 94% year-over-year.
Speculation within the brokerage community has led to whispers of stronger-than-expected earnings for GameStop. Specifically, EarningsWhisper.com reports that the whisper number for GameStop’s fourth-quarter comes in at $2.19 per share – 3 cents better than the consensus.
This optimism is also apparent in GME stock’s ratings backdrop. According to data from Thomson/First Call, GME has attracted 13 “buy” ratings, seven “holds,” and no “sell” ratings. That said, there is room for growth within the brokerage community, as the 12-month price target of $48 represents a premium of only about 17% to GME’s close at $40.91 on Tuesday.
GME stock sentiment begins to get murky once we leave the confines of the analyst community. For instance, options traders have a slight preference for puts in the front two months’ series, with the March/April ratio arriving at 1.16. This reading dips sharply, however, when we zero in on the weekly Mar 27 series, arriving at 0.69.
Much of this weekly call activity may be the result of short sellers hedging their bets. According to data from the most recent reporting period, some 47.3 million shares of GME stock have been sold short, resulting in an impressive short-to-float ratio of 44.7%!
While some of these shorts are most certainly hedged with short-term call options, there is still enough short interest here to fuel a potentially sizeable covering rally – that is, if GameStop posts solid numbers after the close tomorrow night.
Click to Enlarge Overall, weekly Mar 27 implieds for GME stock options are pricing in a potential post-earnings move of about 7.5%. This places the upper bound at $44.09, while the lower bound lies at $37.91. Looking at the technical, GME faces short-term resistance at $43, while longer-term resistance lies at $45. Meanwhile, round-number support resides at $40, while the stock’s 50-day moving average has risen into the $38 area.
Given that the upper and lower bounds breach key short-term support/resistance levels, GME could be in for a much larger post-earnings move.
2 Trades for GME Stock
Call Spread: With strong price action, potentially better-than-expected year-over-year comparisons and a wealth of short interest, the contrarian in me finds it hard to resist a bullish position on GME ahead of earnings. As such, traders looking to bet on a post-earnings rally for GME might want to consider an Apr $41/$44 bull call spread.
At last check, this spread was offered at $1.18, or $118 per pair of contracts. Breakeven lies at $42.18, while a maximum profit of $1.82 is possible if GME stock closes at or above $44 when April options expire.
Put Sell: If you’re not sold on a GME rally, or if overall market headwinds have you a bit concerned about the magnitude of the stock’s upside, a Mar $37 put sell may be a way to capitalize on support in the GME’s technical backdrop. At last check, the weekly Mar 27 series $37 put was bid at 26 cents, or $26 per contract.
As will all put sell positions, you will keep the initial premium of $26 per contract if GME closes at or above $37 when March options expire at the end of this week. However, if GME trades below $37 prior to expiration, you may be assigned 100 shares of GME stock for each put sold at a cost of $37 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
