Fun and Games

11/18/2005 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

In their search for stocks showing technical, fundamental, and sentiment-based strength, both Bernie Schaeffer and Jocelynn Drake see upside opportunity in the video gaming sector. Here, Bernie looks at Gamestop, while Jocelynn bets on Midway.

"Fundamentally, Gamestop ( GME NYSE) looks sound," says Bernie Schaeffer, in his latest The Options Advisor . "Technically, it is consolidating into its rising ten-month moving average, a trendline that has steadily guided the equity higher since August 2004. Compared to the S&P 500, GME's relative strength is perched near an all-time high. In the short-selling community, GME short interest has surged more than 300% during the past 13 months, coming to rest at a fresh all-time high. It would now take more than five days to cover these pessimistic positions, providing GME with ample fuel for a short-covering rally. For options investors, we suggest buying the Gamestop April 30 calls.

"Midway Games (MWY NYSE) scores a ‘perfect 10’ in our Equity Scorecard rating system," notes Jocelynn Drake, analyst at Schaeffer's Investment Research . "Midway produces sports and entertainment titles for the home console game market, including Ready 2 Rumble Boxing, MLB Slugfest, SpyHunter 2, NFL Blitz Pro, and Mortal Kombat. It develops its games for Nintendo's GameCube and Game Boy Advance, Sony's PlayStation 2, and Microsoft's Xbox, as well as for PCs.

"Investor expectations are near a bearish extreme.  Elsewhere, short interest surged by more than 8% in October. Not only does this accumulation of bearish bets account for more than 13% of the stock's total float, but it would also take nine days to buy back this pile of pessimistic positions, providing ample short-covering fuel for MWY on any positive developments for the shares. On the other hand, insider transactions are a positive for the stock, as those in the know have apparently taken a real shine to MWY."

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