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Video game investing has been the pits lately and a disappointment of the home-bound trade for the recession and recovery.  The fun and cool games have so far not translated to major gains that had been seen in the 1990’s and earlier over the last decade.  The reason may be that the market is maturing now that video games are mainstream more than that there are many underlying problems.  We are looking for value or growth opportunities after already having seen others run.

Our review for the best video game sector pick includes reviews of GameStop Corp. (NYSE: GME), ActiVision Blizzard, Inc. (NASDAQ: ATVI), Electronic Arts Inc. (NASDAQ: ERTS), THQ Inc. (NASDAQ: THQI), and Take-Two Interactive Software Inc. (NASDAQ: TTWO).  We have also had to focus on some key issues surrounding Microsoft Corporation (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL), along with Nintendo (NTDOY).

We have provided a basic table below.  After the table comes the company by company review, with our top video game pick of 2011.

GameStop Corp. (NYSE: GME) is constantly thrown out as a takeover candidate for a retail oriented private equity firm.  It is cheap on almost all stock market metrics at less than ten-times earnings for this year and next year.  At issue is that game stores are slowly facing more download competition from game publishers who sell direct via downloads now.  All those “App store downloads” to smartphones bypass GameStop and may actually cannibalize some of GameStop’s revenues.  That trend will not kill the video game retailer overnight, but even if that trend skews over a ten-year period it could mean that GameStop has some of the same traits as tobacco companies faced in the past when it comes to forward revenue trends.  You get a cheap stock today with P/E ratios under 10 and at a fraction of revenues.  As the stock has already bounced off of lows, that is just another reason to look elsewhere.

Activision Blizzard, Inc. (NASDAQ: ATVI) might seem an obvious win for its major score with “Call of Duty: Black Ops” and with all of the World of Warcraft recurring revenues now that Blizzard and ActiVision are one.  Throw in Quake, “Hero” and the rest.  There is just one problem and that is that has been a long and slow steady grower now that it is the largest video game publishing house in the world.  It has an awesome game lineup and is sure to have clarity of forward revenues.  Shares are around $12.50 and the average price target is $14.43. Whether it is fair or not, its near-$15 billion market cap is just already big enough that we’d look elsewhere.

Electronic Arts Inc. (NASDAQ: ERTS) has gone from hot to snot and those old share prices of $50 and higher from 2006 to 2008 are as much of history as World War II documentaries.  A spate of earnings warnings has acted against the company and the attention of the gaming world outside of sports games has moved away from EA.  Still, see more as this goes on.

THQ Inc. (NASDAQ: THQI) is one we already called on to nearly double, and it has done some of what we expected and then some. Much of our thesis revolved around it new hit uDraw system, meant for kids but with an implied ‘grabbing-up effect’ for the parents.  While we still think the turnaround is working, we would be more inclined to tell our readers to take half of those profits and not even bother looking back.

Take-Two Interactive Software Inc. (NASDAQ: TTWO) is one that has been plagued with many problems in the past and a management team that seemed to be willing to keep it from selling no matter what.  Still, with shares up around $12.25 it has already risen more than 50% from the summer lows. Maybe the turnaround is intact, maybe not.  Either way, we are looking elsewhere whether it is fair or not.  Analysts have a price target of $15.05.

Microsoft Corporation (NASDAQ: MSFT) has scored with its Xbox Kinect and it may still be able to live on part of the Halo success.  While there are some limitations and while the game selection may not be the same yet for Nintendo (NTDOY) and its Wii system, the week before Christmas data showed some 4 million units sold.  Unfortunately, Microsoft cannot be evaluated on Xbox alone even if it sells many many more units.  Some food for thought: those sales may help offset any weakness in Windows sales going into 2010 as tablets are taking more of the buying.

If there is one real problem in the wide world of video games, it is Apple Inc. (NASDAQ: AAPL).  Steve Jobs has overrun the world with iPhones and iPads, something which will remain in 2011 as competitors stagger their own ‘me too’ tablet launches.  Where Apple’s big fault here happens to be is that the App store has many many games that sell for roughly $1.00 for the iPad and iPhone.  As we all become less social and more glued to our smartphones and tablets, ask yourself how video game companies have as great of time ahead when they try to sell new games at $59.99.  The Apps can steal and steal video game business away, and the loss of business just cannot even begin to be made up even if video game publishers corner the $1.00 game market ahead.

This is a risk, and one we cannot just blindly endorse without at least some caveats.  Our video game pick for 2011 is Electronic Arts Inc. (NASDAQ: ERTS).  The former leader of the video game publishing world has failed to live up to expectations for longer than we care to consider. It has the sports franchises and we have all but dismissed ‘The Sims’ in the new world of video games (fair, or not…).  EA has been trying to capture more and more of the “Apps” game revenues and at least the cost is lower for development.  It also has many steady performing games in its library.

EA has laid off workers and underperformed for so long that we are calling it the next video game turnaround story for video game investors.  Even if it fails to turn around, the good news is that the sentiment is negative enough that it could be largely priced in.  With shares around $16.40, the consensus analyst target is $19.83 and its 52-week range is $14.06 to $20.24.

EA has a market cap of $5.4 billion.  That $16.40 could be much higher if the company can come close to delivering a new hit in the next 12 to 18 months.  Any hint of good news would likely propel the shares higher in 2011.  It is not exactly cheap with estimates at $0.64 EPS and $3.8 billion in revenues for FY March-2011 and $0.84 EPS and $4.01 billion in revenues for March-2012.  What helps offer support is close to $1.65 billion in cash and short-term investments with no major long-term debt.

We are taking a risk by not chasing the popular gravy trains or by sticking with a winner we have already picked, but sometimes that is the best call.

JON C. OGG