Electronics Boutique Falls on Downgrade

Shares of Electronics Boutique (ELBO - Cramer's Take - Stockpickr) traded off more than 8% on Tuesday after an analyst downgrade.

At the close of trading Monday, the company's stock was trading at about 19.3 times forward earnings, which was near the top of its historic valuation range, noted Michael Pachter, an analyst with Wedbush Morgan Securities, in a research report. Although Electronics Boutique will likely see a short-term sales and earnings boost from Sony's (SNE - Cramer's Take - Stockpickr) recently released PSP game system, the company's heavy investment in new stores will likely limit any earnings upside over the rest of its fiscal year, he said.

"We believe that the near-term catalyst of a positive Sony PSP launch is already priced into the stock, and believe that the company will not substantially exceed high investor expectations for the launch," he wrote.

Pachter dropped his rating on Electronic Boutique from a buy to a hold and set a $46 price target on its shares. At the close of regular trading on Tuesday, the company's stock was off $3.86, or 8.2%, to $43.16. Earlier in the day, it traded down as much as $3.93, or 8.4%, to $43.09.

The selloff marks a sharp reversal in investor sentiment. Through Monday, shares in Electronics Boutique had risen 24% in the last month, hitting their 52-week high of $47.10 in intraday trading that day. Over the previous year, they had risen nearly 72%.

Sales of video game software -- Electronics Boutique's bread and butter -- were surprisingly strong last year. Although many analysts and investors worried of a slowdown or decline as the industry neared the end of its current console cycle, sales of console and handheld-based games grew 8% last year, according to industry research group NPD.

Still, Electronics Boutique's recent stock rise came despite several warnings from the company about short-term earnings or sales troubles. Earlier this month, for instance, the company cautioned investors that it likely wouldn't meet analysts' earnings targets for its first quarter or full year. Saying that a shortage of video game hardware had affected sales of game software, the company in January reported disappointing December sales.