Games Workshop reduced to 2.5%

Games Workshop; (GAW.L, FTSE Mid 250, Market Cap £2097m, 6582p, 2.5% of JIC Portfolio and 0.0 of JIC Top 10)

Since its trading update in early November, Games Workshop has gone up 50%. I have just reduced the holding to 2.5% of the JIC Portfolio.

Enthusiasm, ahead of tomorrow’s interim results and trading update is probably not misplaced but I think there is a risk that after such a strong run, the shares struggle in the short term. “Buy the rumour, sell the news”.

At 6590p the shares are valued at 28x May 2020 forecast earnings; quite a rerating from the 18x prospective, (May 2019 forecast earnings), when I bought the holding exactly a year ago.

I am raising the Risk rating on the stock from Low to Medium. The balance sheet looks strong and it generates loads of cash but as Phil Oakley pointed out in an excellent column in this week’s Investors Chronicle, operational gearing works both ways. Given the investment it has put into increased capacity, raising the cost base, any slowdown in sales could hit profits quite hard. There is no reason to suspect that sales have been anything but strong over Christmas, it’s just that at this valuation, I think the shares have got ahead of themselves.

So, Medium Risk/Medium Return points to a 2.5% position for me. (If the rating was a more reasonable low 20’s PE ratio I would be happy to have it as High Return; I think at some stage that will occur again and I can increase my position. Looking at the graph below, one cash see four occasions over the last two and a half years where the share price has fallen back 20% or more. I think the risk is another is imminent.

I also think I have better use for the cash raised but more on that tomorrow.

I got 6582.626p for my shares and of the £13,484 proceeds, £7,094 was profit.

Screenshot 2020-01-13 at 11.50.09