Yahoo Finance Market Lessons: What a GameStop flop can teach you about investing strategy
Market Lessons is a series that explores the biggest wins, losses and lessons across a variety of investor experiences. We spoke to Rob Khazzam, chief executive officer and co-founder of Float, a Canadian fintech startup.
Inside the investment: Betting on GameStop before it was a meme stock
A few years before the infamous GameStop (GME) short squeeze of January 2021 – the one that would be a part of what is known as the meme stock phenomenon – Khazzam saw opportunity with the video game retailer.
He had previous success investing in GameStop, first buying shares in the company in 2010 and selling them three years later, tripling his investment.
Khazzam bought shares again in 2017. The company was struggling, but still "generating a decent amount of cash flow," Khazzam said. He thought the business was undervalued and viewed it as an opportunity.
"They were trading at a very low multiple of their earnings," he told Yahoo Finance Canada in an interview.
"The price seemed so low that it felt like even at a moderate outcome for the company, you could still make a lot of money. I bought it at a time where I didn't anchor to this idea of buying great businesses. I bought an average business, for a phenomenal bargain basement price."
Bargain prices don't always lead to big returns
Khazzam hoped for management to take those undervalued assets and look at selling them. Not long after he bought the shares, it looked like that could happen.
GameStop announced a strategic review in 2018 that included discussions with third parties about a potential sale of the company. With $820 million in debt on the balance sheet, an analyst told the Wall Street Journal in 2019 that the best path forward involved reducing debt, closing stores and going private.
But that didn't happen. Less than a year after it started the strategic review, GameStop ditched its pursuit of a potential sale, citing "a lack of available financing on terms that would be commercially acceptable to a prospective acquirer."
"Unfortunately, GameStop did not have a management team that was willing to deliver shareholder value, so they were continuing to try to run the business to turn around stores," Khazzam said.
"I felt at the time if they sold the business outright at that moment in time, shareholders would have probably received a significant premium to the share price."
It would be years before GameStop shares would climb out of those basement prices, and it had little to do with the company's assets or retail performance. A Reddit-fuelled short squeeze saw shares of GameStop skyrocket in January 2021, with hedge funds betting against the company losing billions. At its closing high on Jan. 27, GameStop's stock price had logged a one-month gain of more than 1,600 per cent, according to Reuters.
"I was not a holder at the time, unfortunately," Khazzam said. "But investing in GameStop was still a good lesson."
So, what's the lesson?
Just because you see opportunity for a company doesn't mean that management is going to be on the same page as you.
"You can identify value, but if you're a single stockholder in a big company, you don't have any relationship with management or management does not take the path you think may unlock value, you're not going to make money," Khazzam said.
"As a common stockholder, your experience and value of your shares are subject to the decisions of a management team."
While Khazzam's investing strategy has shifted since the GameStop buy, he recommends investors to understand companies and their pricing, relative to other businesses in the same industry.
"Price matters and valuation matters. I think to be an effective investor, you have to be able to… determine if it's a fair price, full price or a cheap price for a company relative to how businesses are typically valued in that category," he said.
"Remember, you are owning a share of a business. It's not a lottery ticket. When you buy a share in a company, you should deeply understand that business."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj. If you have a story about an investing win or loss you'd like to share, get in touch.
Download the Yahoo Finance app, available for Apple and Android.
