GameStop

01/08/2014 9:00 am EST

Focus: TECHNOLOGY

Stephen Quickel

Editor, US Investment Report

Our favorite aggressive growth idea for 2014 is an intriguingly-positioned stock in the red-hot video games market, at a time of rapid, but nerve-wracking technological innovation, suggests Stephen Quickel, editor of US Investment Report.

Owning GameStop (GME) is, essentially, a bet that it has the business model, financial strength, and management savvy, to continue the underlying growth that took it from $16 in mid-2012 to a November 2013 peak of $58.

After three bruising weeks of selling, the price has zipped back—propelled by the recent introduction of the new Microsoft Xbox One and Sony PlayStation 4 gaming consoles, which are currently sparking sales at GameStop's 6,683 company-operated stores in the US, Canada, and Europe.

From today's rock-bottom P/E of 11 times estimated 2014 earnings, and its modest PEG ratio of 0.72, this stock appears headed for the $60 to $65 range, and perhaps higher, despite the technological guessing game among analysts and institutional portfolio managers.

Doubters worry that a rapid onset of direct digital downloading of video games by users could cut into GME's hardware and software revenues.

GameStop proponents note that GME has reworked its business model to expand into the digital market. They also note the company's strong balance sheet, above-average profit margins, and a dividend yield of 2%.

As with all of our growth stock recommendations, particularly those with a speculative element, we advise setting firm stop-loss limits in the 7% to 8% range, advancing them as prices rise and rarely decreasing them.

Overall, GME's dividend, financial strength, and bargain basement P/E and PEG ratios, make it an undervalued stock. And management's steps to cope with the digital downloading threat augur well for the stock's longer-term appreciation.

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