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Forget GameStop: Buy This Value Stock Instead

By Timothy Green - Jan 27, 2021 at 6:55AM

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Wild speculation in a failing video game retailer isn't going to end well. Here's a better idea.

Video game retailer GameStop (GME -6.38%) has been struggling for years as malls hemorrhage foot traffic and console games are increasingly bought in digital form. Things were bad even before the pandemic. Comparable sales plunged nearly 20% in 2019, and the company posted a sizable net loss. The pandemic has boosted demand for video games, but it hasn't been enough to halt GameStop's ongoing demise.

While GameStop the business is a train wreck, GameStop the stock is a different story. Small-time speculators on Reddit's WallStreetBets have helped fuel an epic short squeeze on the heavily shorted stock in recent days. Shares of GameStop were trading for as much as $100 early Tuesday morning, up from around $20 at the beginning of the year. The stock's 52-week low is $2.80.

Fortunes have been minted by GameStop's upward spiral, but none of this is permanent. GameStop stock will eventually go back to being valued based on the company's fundamentals. Those fundamentals are not good.

A risk dial turned to maximum.

Image source: Getty Images.

Nothing's stopping you from speculating on heavily shorted stocks like GameStop, but don't forget that you're gambling, not investing. If you'd like to invest instead, here's an idea: Skechers (SKX -1.86%), a footwear manufacturer and retailer with plenty of growth potential and a rock-solid balance sheet.

A real value stock

Skechers sells its products through its own retail stores, franchised and licensed stores, and its wholesale business. Things got pretty rough during the worst of the pandemic last year, with sales plummeting 42% in the second quarter of 2020.

The situation is now improving. Skechers' third-quarter sales were down just 3.9% from the prior-year period, driven in part by a 23.9% rise in sales in China. The domestic wholesale business returned to growth with a 6.3% jump in sales, and domestic e-commerce sales nearly tripled year over year.

Skechers' results for the next few quarters will be hard to predict given the current state of the pandemic. Any new restrictions on retail operations could halt the company's recovery, while any additional stimulus could boost sales.

The good news is that Skechers has a fortress balance sheet that will allow the company to weather just about any storm. Cash and investments reached $1.5 billion at the end of the third quarter, compared to total debt of about $800 million. That net cash position of $700 million gives the company a big buffer to absorb whatever the pandemic and the economy throw at it.

Skechers' earnings are currently depressed due to the pandemic: Analysts expect earnings per share to plunge by about two-thirds for 2020. But analysts are also expecting a quick recovery in 2021. Based on that 2021 earnings estimate, Skechers stock sports a price-to-earnings ratio of about 17. If you adjust for the excess cash on the balance sheet, the multiple is a bit lower. For reference, the S&P 500 currently has a PE ratio of nearly 40.

It's much more exciting to speculate on the latest craze than to buy and hold a solid value stock for the long run. The GameStop story is still ongoing, but how it ends is just about a sure thing. Money will be lost just as quickly as it was made as the whole thing inevitably unwinds.

The Skechers story, on the other hand, is one of long-term growth potential and a reasonable valuation. Skechers isn't going to deliver crazy returns in the near term, but the stock looks like a good long-term bet for patient investors.

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Stocks Mentioned

Skechers U.S.A., Inc. Stock Quote
Skechers U.S.A., Inc.
SKX
$37.19 (-1.86%) $0.70
GameStop Corp. Stock Quote
GameStop Corp.
GME
$92.11 (-6.38%) $-6.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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