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5 Retail Stocks Jolly With Holiday Cheer

4. GameStop

The highly-anticipated releases of Microsoft's (MSFT) XBOX One and Sony PlayStation 4 this month is good news for GameStop (GME).

GameStop shares are up more than 126% this year. The stock closed down 0.18% to $55.38 on Monday.

However, SunTrust Robinson Humphrey analyst David Magee said there is potential for the stock to rise even further based on "the coming cycle" of new gaming consoles, according to an Oct. 28 note. Magee raised his price target on the stock by $5 to $70 in the note. He rates the company at "buy."

"We believe that GME's viability has clearly been enhanced by the mostly physical composition of the coming cycle," the note said.

"The U.S. [console] market has contracted some 40% in size in recent years, but could rebound 20% in 2014, a tailwind that we don't believe is fully reflected in Street expectations" of GameStop earnings. Magee estimated same-store sales growth of approximately 8% for the company in 2014.

"Interestingly, while some investors think the stock has made its big move, we think there is more upside, noting that the stock is still relatively cheap and that peak multiples weren't achieved until a few months after" past console launches, Magee wrote.

While GameStop is surely to benefit from the strong customer interest in the new gaming consoles, Magee is also optimistic about the company's other initiatives to diversify itself and set up for long-term growth.

"By virtue of its growing used business, forays into digital and mobile, and its opportunities with broader electronics re-commerce and Simply Mac stores" (one of the few authorized Apple resellers), GameStop won't be "nearly as exposed to the software cycle as is commonly believed," the SunTrust note said.

"Right now, [the Simply Mac] chain only has approximately 16 stores in a few western states, but we believe GME plans to use its real estate experience to help that chain grow aggressively in markets too small for Apple stores," the note added. "We don't think it is a stretch to see this mostly hardware business growing to $500 million-$1 billion business someday."

GameStop reports third-quarter earnings on Nov. 21. Analysts, according to Thomson Reuters, expect the company to post earnings of 56 cents a share, up 49% from the year-earlier quarter.
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