Two Cheap Thrills for a Slow Recovery

05/12/2009 12:03 pm EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, finds two companies that provide cheap entertainment, a winning combination in today’s sluggish economy.

From brainy Ph.D. economists on Wall Street to the guy uptown who cuts what's left of my hair, a broad range of market pundits agree: The comeback has begun.

But while the economy is improving, we're not shooting back to the rollicking days of the bubble years. The most probable scenario now is what I'll call a slow-burn recovery.

Mark Zandi, the chief economist for Moody's Economy.com, predicts a flat economy next year and moderate growth in 2011. We won't see full employment until the second half of 2013, Zandi says.

In a slow-burn recovery, strictly defensive stocks will be a drag on your portfolio. Nor do you want too many hypercyclical stocks, in areas like tech, that outshine the most during times of red-hot economic growth, something we won't see.

Despite the depressing side of life during a recession, we haven't turned into a nation of Debbie Downers and Buddhist minimalists. Americans like to have fun. We just want to pay less for it. Two stock plays on this trend [toward cheaper entertainment] are GameStop (NYSE: GME) and Coinstar (Nasdaq: CSTR), he says.

Thanks to Wii Sports, Halo, Mario and other hit games, Americans of virtually all ages spend $22 billion a year to give their thumbs a workout on more than 185 million consoles. The average player in the US is now 35 years old; 25% of people over 50 play video games. And 40% of gamers are female.

Games seem to be a popular escape during the economic pullback; fourth-quarter sales at the GameStop retail chain shot up 22% to $3.5 billion. "Video games are viewed as relatively cheap entertainment," GameStop chief Daniel DeMatteo said in the company's most recent conference call.

Second-hand games generate more than 40% of GameStop's profits. The chain sells consoles and games at more than 6,200 stores, mainly in the US. Digital distribution of games looms as a risk to GameStop, but that's still far off, Morningstar analyst Sunit Gogia says. (GameStar closed below $27 Monday—Editor.)

Coinstar's business niche is that dead zone in stores between the cash registers and the front door. Coinstar partly fills that space with mundane coin-counting machines. But it also puts in rides for kids, vending machines, and those notorious crane games that tease money out of your wallet.

Coinstar has these kinds of machines in more than 90,000 stores, banks, and restaurants, but the one that's really bringing in the bucks right now is a DVD kiosk called Redbox, [which] lets customers rent movies for a mere $1 a night.

Redbox revenue grew 52% last year and constituted 20% of Coinstar's revenue. The company expects Redbox sales to grow 80% this year; it may bring in as much as $750 million. (Coinstar closed above $34 Monday—Editor.)

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