Take-Two Troubles Gaming Sector

The company's weak earnings report could portend holiday woes for gamers.
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There's a lot of action in the video-game segment this week.

Wednesday morning

Take-Two Interactive

(TTWO) - Get Report

,

Electronic Arts

(ERTS)

and

THQ Inc.

(THQI)

announced the release of new games for the holiday season.

On Monday,

GameStop

(GME) - Get Report

announced that the SEC has given the OK to its purchase of

Electronics Boutique

(ELBO)

and that Oct. 6 would be the shareholder meetings of both firms, where shareholder approval of the merger is expected.

Then Wednesday afternoon Take-Two released disappointing earnings, reporting a loss of 41 cents a share against expectations for a loss of 38 cents, and lowering guidance for the remainder of 2005.

That all raises the question: Will holiday sales of video games hold up in the face of expected consumer stress?

The background issues include the potential slowdown in holiday sales because of higher energy costs, and an anticipated economic slowdown because of Katrina; the suitability of games in terms of violence and hidden sexual content; and the fact that Sony's PlayStation 3 will not be in the mix until 2006, missing the 2005 holiday season.

Microsoft's

(MSFT) - Get Report

soon-to-be-released xBox may create some buzz, but will it be strong enough to offset the other factors?

In this environment overvalued retailer GameStop is completing the acquisition of even more overvalued Electronics Boutique, but will retail sales for games follow the upward movement of GME's share price?

All gamemakers are overvalued, but some have become strong momentum stocks in recent weeks, so it is worthwhile to update their profiles according to my model.

Take Two Interactive:

My model shows the stock 19.2% overvalued with a negative weekly chart pattern, which stays negative on a weekly close below its 5-week modified moving average at $24.81. Before reporting earnings on Wednesday after the closes TTWO was just below my quarterly pivot at $24.27, which has been a magnet in recent weeks. In after-hours trading TTWO sold off, and traded around my weekly pivot at $22.62. Above $24.27 is a monthly risky level at $25.67. (A risky level is a price at which investors are likely to reduce holdings, according to my models.)

Electronic Arts:

My model shows the stock 24.0% overvalued with a negative weekly chart that stays negative on a weekly close below the five-week modified moving average at $58.10. My monthly value level is $52.83 with an annual pivot at $57.34, which has been a magnet in recent weeks. Below that is my annual value level at $46.25, which has not yet been tested in 2005. This will be a key level given overall weakness in the gamemaker segment. (A value level is a price at which my models project that buyers will emerge.)

Activision

(ATVI) - Get Report

: My model shows the stock 60.5% overvalued with a positive but overbought weekly chart, which will stay positive on a weekly close above the five-week modified moving average at $19.97. This is the strongest momentum stock among this group, opening at a new 52-week high of $23.07 Wednesday morning, vs. a weekly risky level at $23.13. The key levels to hold on a pullback are the monthly and quarterly pivots, which stand at $22.15 and $21.29, respectively.

Midway Games

(MWY)

: My model shows the stock 92.5% overvalued with a positive but overbought weekly chart. The pattern will stay positive on a weekly close above the five-week modified moving average at $13.95. Midway is consolidating off its 52-week high of $16.80 set on Aug. 24. I show a monthly value level at $14.23 and a quarterly pivot at $16.21.

THQ: My model shows the stock 7.1% overvalued with a positive but overbought weekly chart. THQ will shift to negative on a weekly close below its five-week modified moving average at $22.22. The stock reached a 52- week high at $24.33 on Aug. 3. If shares stay below semiannual/monthly pivots at $22.53/$22.97 there is risk to at least my annual pivot at $21.75.

GameStop announced the purchase of Electronics Boutique in April for $1.44 billion as a competitive move against

Wal-Mart

(WMT) - Get Report

, which is the leader in sales of video games. To review, GameStop will pay $38.15 in cash and exchange 0.78795 shares for each ELBO share. The combined company is expected to have about a 20% market share in game sales. It should expand its footprint internationally and will target game enthusiasts who usually don't purchase game titles from Wal-Mart. But these shares are significantly overvalued, and GameStop could correct once the merger is competed.

My model shows the stock 52.9% overvalued and Electronics Boutique 82% overvalued, making the combined company a pure momentum trade. The weekly chart profile for GME is positive with a close this week above the five-week modified moving average at $33.05. On Wednesday GME reached yet another new 52- week high at $36.41 vs. the prior 52- week high of $36.17 set on July 12. As a pure momentum trade (not for the long-term investor), if there's a breakout to a new high, the upside is to my monthly risky level at $39.50. The key level to hold on a pullback is a weekly pivot at $34.65.

My Keys to Trading

Fundamental Screens:

I calculate a fair value for every stock, which is the price that a stock can trade at in a perfect world. Fair value is not a price target. Fair value is based on the stock's past data and projections for the future. Fair value is based upon the trailing 12-month EPS, the forward 12-month estimated EPS, and the yield on the 30-year Treasury. How these data points are weighted is based upon an historical analysis of the stock's price history with some 17 other variables influencing the calculation based upon its sector and industry group.

Weekly Chart Profile:

A stock with a positive profile has a weekly close above its 5- week modified moving average with rising 12x3 weekly slow stochastic, which is a measure of momentum on a scale of zero to 100. A reading below 20 is oversold, while a reading above 80 is overbought.

Value Levels, Risky Levels and Pivots:

A value level is a price at which buyers should emerge on share price weakness. A risky level is a price at which sellers should reduce holdings on share price gains. A pivot is a value or risky level that was violated in its time horizon, acting as a magnet during the remainder of that time horizon. These levels are calculated in weekly, monthly, quarterly, semiannual and annual time horizon, based upon the past nine closes in each time horizon. My theory is that the closes over a nine-year period are the summation of all bullish and bearish events for that market or specific stock.

Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of

TheStreet.com Technology Report

newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --

click here

to send him an email.