i'm bullish on gme, the video-game retailer. gme operates more than 5,000 retail locations throughout north america and europe. its stores sell new and used video-game software, hardware and accessories. the business is well positioned to benefit from several trends, including growth of the gaming industry, a shift in consumer spending habits and consolidation of the retailing environment. sales of game software soared 63% in march, and titles such as "Guitar Hero" and "Halo" have set single- day sales records. this trend should continue, as there are very high expectations for the new "Grand Theft Auto," which is scheduled for release tomorrow.
hardware sales, which showed a 50% year-over-year increase in march, should continue apace as prices for msft's Xbox and sne's PlayStation are expected to decline to the $200 level. also, nintendo's hit Wii platform is finally ramping up production to match demand. as more consoles are sold, sales of software and accessories -- which have higher profit margins -- will also increase. gme, which is the largest specialty chain in the video-game space, should benefit from the broader weakness in spending and a generally tough retail environment. this is leading to industry consolidation as big-box stores such as cc struggle and have been closing locations at least partly due to competition from gme.
in addition, costs could actually decline for gme because rental rates at many retail locations, especially malls, are declining. the stock has gained some 30% over the past two months and recently cleared resistance at the $54 level. however, at $56.50 it is still about 15% below its 52-week high of $63 a share. as consumers continue to allocate more discretionary spending toward home entertainment, gme shares should continue to rise.
here's one possible way to play it:
-- buy to open July $65 calls (GMEGM) at $1.60 a contract.
i have an upside target of $70 a share. i'd use a close below $52 a share as a stop for exiting the position.
disclosure: long gme calls; DO YOUR OWN DD!!