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Sizzle Or Steak: GameStop Vs. Dick’s

Having edited The Prudent Speculator for more than three decades, I am seldom surprised by gyrations in individual stock prices.

Anything can happen in the short run—sometimes stocks soar on a case of mistaken identity, such as when Facebook nine months ago announced plans to change its corporate name to Meta Platforms, which ignited a 26% after-hours gain that day in Meta Materials (MMAT), a small Nova Scotian specialty chemicals company.

Never mind that Meta Materials had nothing to do with Facebook or the metaverse, with the financial press quick to point out that folks were buying the wrong stock. Of course, that seemingly important fact did not slow interest in the Canadian company as the stock price jumped above $6 over the ensuing two days with more than 36 million shares changing hands.

Skip ahead eight months and the hype has been replaced by the realization that MMAT remains a profit-challenged company (EPS were -$0.39 in 2021 and the current analyst estimates for 2022 and 2023 stand at -$0.17 and -$0.12, respectively) that just had to issue $50 million worth of stock at $1.35 per share, the dilution from which sent the share price down to $1.00 or so today.

Obviously, Meta Materials should have taken advantage of misplaced investor euphoria sooner…as did the management of video-game merchant GameStop
. Seemingly living a very charmed life, given that the stock was trading for $4 two years ago, the specialty retailer issued 5 million shares at $225 each in June 2021, with the $1.1 billion raised providing plenty of capital to fund the meme-stock darling’s growth initiatives. Alas, those who footed the bill back then are still sitting with sizable losses.

Of course, I understand that GameStop shares have been on another run higher as traders are enthused about the company’s new non-fungible token (NFT) marketplace and they are enamored with Chairman and Chewy
founder Ryan Cohen and they are hoping for a repeat of the short-squeeze that sent the stock into the stratosphere last year.

However, the latest move higher was ignited by the announcement of a 4-for-1 stock split earlier this month, even as the very next day the company fired its CFO and laid off numerous employees as part of its latest turnaround plan. Most investors understand that a stock split in and of itself changes nothing about the value of a business but letting go of a CFO is seldom viewed positively, while job cuts do not exactly inspire confidence in the future for a momentum-investor favorite.

Also moving higher over the last couple of weeks have been shares of Dick’s Sporting Goods (DKS). While GameStop appears to be undergoing an existential crisis as it tries to move away from its video-game store heritage, Dick’s identity as a full-line sporting goods retailer that offers a broad assortment of brand and private label apparel, footwear and equipment in a large-box store format appears very much intact.

Competition is dwindling to just a few players nationally and DKS is the largest pure sporting goods chain in the U.S., and often the only game in town in many of its markets. Dick’s has materially improved its omnichannel execution, with digital sales rising to 21% of the total in 2021, while the company has curated a set of differentiated offerings across brands, price points and categories. Partnerships with national brands, consolidating wholesale partners and appealing new store formats offer multiple levers for long-term growth.

Of course, sports equipment may not be as exciting to some as NFTs, but DKS is expected to earn more than $11 per share this year and next, putting the P/E ratio below 9, while shareholders are rewarded with a big stock buyback program and a 2.1% dividend yield.

Yes, the upside for GME could be large should management pull off the seemingly improbable, but I think the downside is significant, given that the company is expected to post sizable operating losses this year and next.

Time will tell which will prove to be the better long-term play, but for those who wish to speculate prudently, I would always opt for the DKS steak over the GME sizzle.