Take-Two Interactive ( TTWO) has been beaten and bullied, but does that mean buy?

With the stock hitting a 52-week low this week and sitting at a deep discount to video-game peers such as Electronic Arts ( ERTS) and Activision ( ATVI), some portfolio managers see an opportunity to get the publisher of the industry's most popular title on the cheap.

Just in time for a possible holiday-season turnaround, Take-Two is releasing a slew of new games, including a new version of its hot Grand Theft Auto -- dubbed Liberty City Stories -- for Sony's ( SNE) PSP handheld-game system.

Liberty City Stories "could be the title for PSPs, and if it is successful, could not only have huge penetration but also stimulate PSP sales," says Joe Spiegel, a fund manager at Dalek Capital, who has been buying shares of Take-Two recently and is now long the stock, short put and long call options on the shares.

However, the company's recent sales have been disappointing, raising the possibility that it could miss earnings estimates for its current quarter. That would mark only the latest stumble for a company that's bumbling along.

And with some analysts already worrying that retail holiday sales could be disappointing , some investors fear that things could get worse before they get better.

Shares of Take-Two bottomed out on Wednesday in intraday trading at $17.64, a new 52-week low; an analyst upgrade subsequently boosted the stock 7% on Thursday. But even after that, Take-Two is still down by one-third from its peak in June.

The selloff is no surprise -- the company has been wallowing in bad news since this spring, when word leaked out that its flagship title, Grand Theft Auto: San Andreas, contained hidden sexually explicit content.

After an investigation by an industry trade group, Take-Two pulled the title from store shelves and set up a $33 million reserve to cover returns of the game.

But the pain didn't stop there. Last month, the company missed analysts' estimates for its third quarter and gave disappointing guidance for the rest of this fiscal year and next.

As part of the release, the company warned that it is delaying two anticipated releases: a version of Grand Theft Auto: San Andreas title for Japan and a new game called Bully.

And last week came word from research group NPD that retail sales of the company's games in September fell 44% from last year. Although the company re-released San Andreas -- sans the sex scenes -- sales of the game fell below some analysts' expectations.

Perhaps more troubling, sales of Take-Two's NBA basketball game slipped dramatically in units and in dollar terms from the year-ago level as the company attempted to raise prices on the game.

Sports games have been one of the key areas that Take-Two has targeted as a way to diversify beyond Grand Theft Auto.

Amid the troubles, a top shareholder, Wellington Management, which manages various mutual funds for Vanguard, Seligman and Hartford, sold off 5.6 million Take-Two shares, or about 60% of its stake in the company, in the third quarter, according to data from FactSet Research's LionShares site.

But if Wellington was betting that the time was ripe to get out of Take-Two shares, other investors believe that the time has come to get in.

At their current price, shares of Take-Two are trading at about 14 times the company's expected earnings in its coming fiscal year. In contrast, shares of Electronic Arts and Activision are trading at 29 and 25 times expected earnings, respectively, for their fiscal years that begin in April.

And even THQ ( THQI), whose revenue is smaller than Take-Two's and which has no games in the same neighborhood as Grand Theft Auto, is trading at nearly 19 times fiscal 2007 earnings.

Not only is the stock a bargain, the new titles could also boost results, some investors say. In addition to Liberty City Stories, the company recently released a title based on The Warriors, a cult movie hit from the 1970s, that has been getting good reviews.

Xbox on Tap

Also, with its strong lineup of launch titles for the device, the company could benefit from Microsoft's ( MSFT) debut of Xbox 360 next month.

The Xbox 360 and other upcoming next-generation consoles from Sony and Nintendo "should create some excitement for the video game category," says Steve Monticelli, president of Mosaic Investments.

Take-Two's stock is "a lot more interesting" after the recent selloff, Monticelli adds, though he has no current position in the shares.

But even Monticelli has some concerns. A recent California law bans the sale of violent video games to minors. Assuming the law is not overturned in court, retailers could be barred from selling Grand Theft Auto to minors.

If that happens, retailers such as Wal-Mart ( WMT) might well repeat what they did this summer, pulling the game from their shelves, Monticelli fears.

"That wouldn't be good for Take-Two," he says, adding that there always seems "to be a cloud over Take-Two, whether they deserve it or not."

While Liberty City Stories might be a hit, the relatively small user base of PSPs mean that the company's take from the game is likely to be limited, says one buy-side analyst who asked to remain anonymous.

And like other video-game companies, Take-Two faces potentially poor results in the near term as it invests in games for the next generation of consoles. With development costs rising, the risk of new games jumps as well, the analyst says.

"I think that's something investors are rightfully concerned about," says the analyst, whose firm has been in and out of Take-Two shares in recent months.

Still, even the analyst thinks that there's "real value" in the company. The question is when to start buying. "There's big upside if you get it right," he says. "But a lot of risk, too."

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