GameStop CFO: GME a Bargain

According to an SEC filing dated May 27, GameStop (GME - Analyst Report) CFO David Carlson purchased 25,000 GameStop shares for $562,000, which comes out to an average price of $22.48. Mr. Carlson now owns a total of 194,828 GameStop shares.

That is a pretty substantial purchase, and it should put GameStop's recent sell-off into perspective. It was just last week that GameStop reported solid first quarter results, but disappointed investors with its second quarter outlook. Investors (mistakenly) viewed management's tepid second quarter outlook as evidence that even GameStop could not escape the reach of the slowdown in consumer spending. The stock sold-off hard on the news.

However, we would like to point out that GameStop's outlook had more to do with the video game release schedule than with overall economy. Video game publishers decided to push back the release dates for their most promising games until second half of the year. This left the cupboard bare for the second quarter.

Most of the time investors should be skeptical of a retailer that says to look past its current results and point to a second half recovery. This is not one of those times. The second half of this year the release schedule looks strong, with titles including Batman Arkham Asylum, Madden NFL 2010 and Modern Warfare 2. What's more, there is a good chance that Sony (SNE - Analyst Report) finally cuts the price of its PlayStation 3, which would stimulate more demand for consoles and games.

Despite delivering strong growth sales and earnings growth throughout this economic downturn, GME shares are trading at about 8 times the Zacks consensus EPS estimate for 2009, even though the consensus expects the company to increase its earnings by 16% in 2009 and 13% in 2010.

We still think the market is wrong on GameStop, especially the sell-off after its first quarter report last week. Given David Carlson's recent buying activity, it appears that he agrees with us. We rate the stock a Buy with target price of $34.