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TheStreet Open House

Forget Zynga -- Buy These Stocks Instead

NEW YORK ( Stockpickr) -- Perhaps the stock market isn't such a mystery. A recent IPO could have created an unusual anomaly whereby a new entrant was wildly overvalued while proven, longstanding operators were seemingly being ignored.

Thankfully, investors came to their senses and quickly unloaded shares of new IPO Zynga (ZNGA). Shares fell roughly 10% in their first five trading sessions.

Leading up to its IPO, Zynga garnered lots of buzz -- and for good reason. People like games, especially on new platforms such as Facebook. And considering we'll be wasting many hours in the future on such distractions, it pays to find the winning investment angle to profit from the ongoing trend. The good news: You can find great investment opportunities among the established video game firms. These firms already learned the secret to industry success: franchises.

>>7 Extreme Stocks to Trade in This Volatile Market

While Zynga had a big score with Farmville and then with Cityville, newer titles haven't been as hot. In contrast, legacy franchises represent a sure-fire chance at repeat success compared to the riskiness of new un-tested concepts.

A quick glance at the top-selling video games tells you just how important franchises are. Activision Blizzard's (ATVI) Modern Warfare 3 was the top-selling title in November. Other sequels in the top 10 include Electronic Arts' (EA) Battlefield 3 in third place, EA's Madden NFL 12 in sixth, Sony's (SNE) Uncharted 3: Drake's Deception in seventh and THQ's (THQI) Saints Row: The Third in eighth.

Some of these popular console-based games develop true cult followings, and each sequel can command ever larger audiences. For example, Take-Two Interactive's (TTWO) Grand Theft Auto, which first launched in 1997, has seen a steadily rising following. Grand Theft Auto 2, released in 1999, saw sales double to two million. Grand Theft Auto III, released two years later, sold a stunning 15 million copies. Grand Theft Auto IV? How about 22 million units sold.

Care to guess why Take-Two is expected to see EPS jump from 18 cents in the current fiscal year that ends in March to a hefty $2.50 a share in fiscal 2013? Because Grand Theft Auto V is set for release later this year. (A recently released short video that teases the new title left many tongues wagging.)

Although Take-Two continues to develop new fresh concepts in search of a blockbuster that may form the foundation of the next big franchise, it still devotes consider resources to existing franchises along with Grand Theft Auto. For example, in coming quarters, gamers will get new renditions of popular titles such as Max Payne 3, as well as the Darkness II, BioShock: Infinite and Borderlands 2.

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