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Why GameStop Stock Popped 13% Today

By Rich Smith – Aug 22, 2019 at 12:38PM

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"The Big Short" investor thinks the video game retailer could be a big 'ol buy.

What happened

Shares of GameStop (GME 6.29%) have been hammered this year, falling from January highs approaching $16 to a new number about 75% lower -- $4. But the video game retailer's stock is getting a lift today, rising 13.4% as of 12:10 p.m. EDT, apparently boosted by two positive news items.  

First, details are filtering out about a round of layoffs at GameStop -- more than 120 workers, or about 14% of the company's corporate staff. Second, Barron's reports that subprime mortgage shorter Michael Burry is taking a shine to GameStop stock, and believes the company has a "very good" balance sheet and "cash flow [sufficient] to justify a much higher share price."  

Rising orange and blue stock chart on LCD screen

Image source: Getty Images.

So what

In a statement, GameStop explained that it's doing the layoffs "to reduce costs and better align the organization with our efforts to optimize the business." At the same time, Burry seems to think the business doesn't even need all that much improvement.

Seventy-five percent cheaper than it cost at the beginning of the year, GameStop shares could be a buy already.

Now what

Not that this will be immediately obvious. Analysts who follow GameStop expect the company to report a massive $673 million net loss this year, according to data from S&P Global Market Intelligence. It's only next year that analysts think GameStop will resume growing. But if it does, its P/E ratio will be a rock-bottom 2.5.

Unless you think GameStop is going bankrupt -- the fact that the company remains free-cash-flow positive and has more cash than debt on the balance sheet suggests that's unlikely -- now might be a good time to take a shot at catching this falling knife.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop. The Motley Fool has a disclosure policy.

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