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Let the Games Begin

The highly speculative video gaming sector has been, for the most part, overvalued and too risky for the long-term individual investor this year. However, traders adept at trading off the charts have had some success.

There is opportunity again, as retailer GameStop (GME - Get Report) reported earnings Tuesday morning.

The company said its third-quarter EPS was 15 cents, beating the consensus by a penny. Offering guidance on the critical fourth quarter, the company said it expects comparable-store sales to range between flat and up 2% from a year ago. Full-year EPS was targeted at $1.65-$1.70 vs. consensus analyst expectations of $1.70. Limited supply of Microsoft's Xbox 360, and slower-than-expected new video-game sales in the first three weeks of November, were the reasons for the slightly disappointing projection.

The company reported that it almost immediately sold out of every Xbox, and that this was a positive sign that the hard-core gamer is alive and well. The total amount of Xboxes available for the holidays may be less than expected, however, which could be a drag on game sales.

GameStop has been and continues to be an extremely overvalued stock -- 49.4% overvalued at Monday's close with fair value at $23.54 -- and shares should remain below the 52-week high of $38.41 that was set on Sept 14. The weekly chart profile is positive, but a close this week below the five-week modified moving average at $35.03 would signal an end to this positive momentum. A weekly close below $35.03 indicates downside risk to my quarterly value level at $30.17. Shares were recently trading at $35.98.

Notable Overvalued Gamers

Take-Two Interactive (TTWO - Get Report) is 13.9% overvalued with fair value at $16.39. The weekly chart profile is oversold, which indicates that the Nov. 1 low at $16.92 should not be retested anytime soon, particularly given that Take-Two's games appear primed for sale on the Xbox. This shapes up as a potential trade to my quarterly risky level at $22.78, not a long-term investment. Shares were recently trading at $18.28.
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