It’s rare to find a stock that has received three earnings upgrades in two months, but that’s exactly what’s happened with Games Workshop (GAW). In fact, since July this year the consensus analyst forecast for its 2021 earnings per share has increased by more than 75%.

The scale of the upgrades goes to show that Shares was too pessimistic in its evaluation of the company in July when we effectively said: ‘Great business, wrong price.’ We underestimated its ability to keep growing earnings at a rapid pace and the company’s tendency to under-promise and over-deliver.

Its shares took quite a knock in early November when investors rotated from growth to value style stocks, but they’ve started to make a slow comeback in recent weeks. On 7 December when the company published its latest trading update, Games Workshop’s shares initially jumped more than 7% but strangely they had lost  all the gains a few hours later.

It’s an odd situation – a company delivering a string of good news should in theory enjoy an ongoing share price hike. However, there are perhaps two reasons why Games Workshop’s shares aren’t currently in a sustained upward trend.

Firstly, Sanford Deland, as the fourth largest shareholder in Games Workshop and the largest individual fund owner via its SDL UK Buffettology Fund (BKJ9C67), is a forced seller. As discussed on Shares’ Money & Markets podcast, Games Workshop became too big a stake in Buffettology thanks to earlier share price gains. Fund rules state individual holdings can be no more than 10% of the portfolio.

Secondly, the market is becoming more sceptical towards companies that have done well during the lockdown, for fears that 2020’s success won’t be repeated next year. For example, Reckitt Benckiser (RB.) has fallen 19% from its year-to-date peak as investors question its ability next year to match 2020’s strong sales of health products.

Games Workshop clearly benefitted from people being stuck at home during lockdowns, looking for hobbies to keep them occupied. What happens when the Covid-19 vaccine starts to be rolled out and people want to venture outside?

For the year to May 2021, stockbroker Peel Hunt is forecasting 30% rise in sales to £350.1 million. It believes sales will progress even further to £375 million in the following year.

This implies there will not be a repeat of  problems 15 years ago when the business suffered a very large hangover when consumer interest in fantasy worlds inspired by the Lord of the Rings films faded away.

In 2005 it reported a 31% slump in pre-tax profit and said: ‘Following the phenomenal growth of the past few years, which has proven to be unsustainable, we do need to call “time out” while we re-establish our more normal pattern of growth in sales and profits.’

Shares believes it would be wrong to assume Games Workshop is going to experience another hangover. It was doing very before lockdown first began and its success has been driven by a growing number of people experiencing its products and getting more involved in its fantasy worlds. This doesn’t seem like a fad driven by a few Hollywood movies.

Take advantage of the muted market reaction to the latest trading update and buy the shares.

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