For Breakout Results, Go With These Stocks

My bullishness on video games came as a result of a number of factors. First, I liked what we heard about the industry's growth prospects from diversified retailers. We also had other winners in the video-game space, including Activision (ATVI - Cramer's Take - Stockpickr) and THQ (THQI - Cramer's Take - Stockpickr), that gave bullish outlooks for industry growth.

Our industry research indicated an almost absurd number of attractive software titles due for release during 2007, including Microsoft's (MSFT - Cramer's Take - Stockpickr) Halo 3, the biggest software title release in years. And in general, we believed that video games would dominate holiday shopping lists, which turned out to be true as the Nintendo Wii became the hottest holiday gift of the year.

It's always best, when possible, to do some research in person. And it's often quite easy. Before I invested in GameStop, I checked out their stores. I was very impressed with their retail sales team, which tended to be highly knowledgeable and aggressive. This was not the case with the sales team from Circuit City (CC - Cramer's Take - Stockpickr). Not only could GameStop employees effectively answer all my questions, they were also cross-selling products and encouraging preorders of upcoming games. I believe this culture was a key factor in GameStop's continued market-share gains.

I was also very impressed with GameStop's track record of beating analysts' estimates and improving its balance sheet, along with management's ambitious plans for expansion throughout the world. I also liked the company's foresight in past acquisitions, which gave it dominant market share within the U.S.

As I was doing my research, it became increasingly obvious that GameStop had the makings of a home run. With an investment opportunity like GameStop, small investors have an advantage over the big institutions. For example, if a $100 billion mutual fund wanted to allocate 5% of its assets to GameStop at the beginning of 2007, it would have had to buy all the common stock outstanding. But an investor with a smaller portfolio would have little trouble making that type of allocation.

While I do not believe that GameStop will perform quite as well as it did in 2007, the company is shaping up for a very good year in 2008. In particular, we believe the Sony (SNE - Cramer's Take - Stockpickr) PlayStation 3 console will be a very hot item during the second half of the year, which should drive a significant increase in industry sales growth. Plus, as GameStop's sales mix becomes more heavily weighted in software vs. hardware, we expect profit margins to improve substantially throughout the year.

GameStop is a selection of TheStreet.com Breakout Stocks service . Michael Comeau regularly scans the investment universe for breakout stocks like Priceline.com(PCLN - Cramer's Take - Stockpickr) and Rubicon(RBCN - Cramer's Take - Stockpickr) to add to the Breakout Stocks model portfolio.