Playing Five Gamer Stocks

This column was originally published on RealMoney on April 4 at 10:51 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Earlier this decade, Microsoft(MSFT Quote), Sony(SNE Quote) and Nintendo released a new generation of gaming consoles that delivered stunning graphics, addictive titles and heart-pounding action.

But the industry has fallen into a major funk this year, held down by a range of issues that are undermining profitability.

On Monday, I examined the many challenges facing this unique business and offered a sobering assessment of its future prospects. Today let's examine the charts of the major players to see if the smart money is taking a different view of this sector's outlook.

Electronic Arts(ERTS Quote) is a blue-chip game developer with hundreds of titles on all major platforms. The stock hit its all-time high over a year ago and then started a major correction that's run almost 20 points. The good news is, it hasn't tagged a new low in 11 months. The bad news is, it's made little or no progress since that time.

The stock needs to hold $50 in the weeks ahead or its long correction could start another leg down. Conversely a rally over the yearlong trend line at $55 could add a quick 10% to the stock price. In any case, there's little evidence that investors will be lining up to own this one anytime in the near future. That's bad news for the rest of the industry.

Take-Two Interactive Software(TTWO Quote) showed how dumb a gaming company can be when they embedded secret sex scenes into the popular Grand Theft Auto: San Andreas game. Fallout from the shocking discovery is bringing political pressure on the entire industry at a critical time, when it needs all the friends it can find.

But the long-term chart shows this company had serious issues well before the scandal erupted. After hitting an all-time high in June 2005, price plummeted to a three-year low at 13.60. The post-January bounce has been unconvincing and should eventually yield a selloff back to the tenuous low. The best advice to everyone is to keep as far away as possible from this stock.

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Activision(ATVI Quote) has one of the hottest titles on the market right now, with its Call of Duty sequel. But that hasn't stopped the Santa Monica-based company from running into the same critical issues as its competitors. Notice how the stock topped out last year, printed a small double top, and then broke down in a volatile correction.

Now take note of how the stock broke support right after Microsoft's limited Xbox 360 release in November. It finally bounced in March and now shows the first stage of a sideways pattern that could last a very long time. Unfortunately, accumulation hardly budged in the recent uptick, so investors still aren't finding much to love here.

THQ(THQI Quote) is best known for its World Wrestling Entertainment titles and was the only major gaming company to meet sales projections last year. This solid performance let the stock avoid most of the selling pressure suffered by its competitors. Indeed, this looks like the best opportunity for anyone who wants to play the gaming sector.

Notice how price hit a new high in January, dropped through its 50-day moving average, jumped back across it and bounced sharply last week. The transition of these events sets the stage for a rally back to the three-month high. In the longer term, this stock also shows a multiyear breakout pattern that should trigger on a rally up and through $30.

Konami(KNM Quote) is the biggest gaming operation you've probably never heard of. It's a well-capitalized Japanese company that's released dozens of popular gaming titles, such as Metal Gear Solid. It's also a conglomerate with key operations outside of multimedia software. This diversity has helped its stock performance in recent months.

It's interesting that price action is moving in the opposite direction of most American gamemakers. In fact, the stock bottomed out at exactly the same time that Microsoft released Xbox 360 and moved higher in a strong rally throughout the first quarter. But price has now reached key resistance at $26 and could selloff to $20 before it recovers.

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