Amid A Correction In Video Game Stocks, These Are The 5 Names You Should Consider Buying

Video game stocks had one of their best years in 2015, even though the broader market ended the year nearly flat. The bumper sales growth of the PlayStation 4 and Xbox One consoles, coupled with the exponential rise of mobile gaming led most video game companies to post spectacular financial numbers during the year, which translated well for their stocks. However, this year the story is a little different. While the broader market has recouped the losses it suffered at the beginning of the year, several video game companies are trading deep in the red. According to analysts, after the huge rally they saw last year, video game stocks have cooled off to the point that investors should considering buying into them again. Considering that, we at Insider Monkey have compiled a list of video game stocks based on how popular they were among the over 800 hedge funds that we track at the end of December. Read on to uncover which five gaming industry companies were the most heavily backed by smart money going into 2016.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Glu Mobile Inc. (NASDAQ:GLUU)

– Investors with Long Positions (as of December 31): 13

– Aggregate Value of Investors’ Holdings (as of December 31): $50.57 million

Glu Mobile Inc. (NASDAQ:GLUU) is the only company on this list whose stock fell heavily last year. During the fourth quarter, when its stock tumbled by 44.4%, the ownership of the company among funds in our system declined by eight and the aggregate value of their holdings in it nearly halved. Phil Frohlich‘s Prescott Group Capital Management cut its holding in the company by one-third to 362,739 shares during that time. This year the stock has changed its trajectory and is currently trading up by almost 15% year-to-date, owing largely to the rally it has enjoyed after the company reported better-than-expected fourth quarter numbers in early-February. While analysts were expecting the company to report a loss of $0.03 per share on revenue of $50.46 million for the quarter, it declared EPS of $0.02 on revenue of $57.90 million. Chinese investment holding company Tencent recently revealed in a regulatory filing that it owns 21.5% of the outstanding shares of Glu Mobile Inc. (NASDAQ:GLUU) as of February 25.

#4 Zynga Inc (NASDAQ:ZNGA)

– Investors with Long Positions (as of December 31): 20

– Aggregate Value of Investors’ Holdings (as of December 31): $509.60 million

Though the number of investors in our database with long positions in Zynga Inc (NASDAQ:ZNGA) dropped by six during the fourth quarter, the aggregate value of their holdings in the company went up by $14.5 million during that time. Among the investors that increased their holdings in the company during the fourth quarter was Cliff Asness‘ AQR Capital Management, which held nearly 16.21 million shares of Zynga Inc (NASDAQ:ZNGA) on December 31. Shares of Zynga have lost nearly 20% of their value so far this year and are trading at almost one-fifth of their IPO price. However, analysts feel that the stock of the social games developer is now ready to move higher based on recent announcements made by the company. On February 24, the Wall Street Journal reported that the company is planning to sell its expensive headquarters, while mere days later, Mark Pincus stepped down for the second time as the CEO of the company, to be replaced by Frank Gibeau

The three gaming stocks with the highest scores among top investors are revealed on the next page.

#3 Take-Two Interactive Software, Inc. (NASDAQ:TTWO)

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) made its lifetime high of $37.71 earlier this month and currently trades flat for 2016. During the October-to-December period, the ownership of the company among investors we track inched up by one and the aggregate value of their holdings in it also saw a marginal increase of $9.9 million. However, billionaire David Einhorn’s Greenlight Capital reduced its stake in the company during the same time by 26% to 3.12 million shares. Several analysts who cover the stock currently feel that it will continue its bull run in the coming quarters because of the company’s competitive expansion strategy and its strong pipeline of games for the next two years. On February 8, analysts at Jefferies Group reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $48 from $44.

– Investors with Long Positions (as of December 31): 36

– Aggregate Value of Investors’ Holdings (as of December 31): $914.95 million

#2 Activision Blizzard, Inc. (NASDAQ:ATVI)

– Investors with Long Positions (as of December 31): 53

– Aggregate Value of Investors’ Holdings (as of December 31): $3 billion

Amid a 25% rise in Activision Blizzard, Inc. (NASDAQ:ATVI)’s stock during the fourth quarter, investors in our system which were long the stock rose by ten, while the aggregate value of their holdings in the company increased by over 44%. With ownership of 12.78 million shares of the company, Philippe Laffont’s Coatue Management was its largest shareholder in our database at the end of December. Though shares of the company have fallen by over 18% so far this year, analysts and investors are not concerned. According to them,  the company will perform well in the long-run thanks to its bestselling franchises like ‘Call of Duty’, and is increasingly focusing on monetizing its content, while at the same time investing heavily in the future of gaming. Activision Blizzard, Inc. (NASDAQ:ATVI) also completed its $5.9 billion acquisition of King Digital last month, which marks a big move by Activision Blizzard into the mobile and social gaming arenas. The company’s stock currently sports an average rating of ‘Buy’ and an average price target of $37.88 from the 22 premier research institutions and analysts who cover it.

#1 Electronic Arts Inc. (NASDAQ:EA)

– Investors with Long Positions (as of December 31): 57

– Aggregate Value of Investors’ Holdings (as of December 31): $2.26 billion

After its ownership among the funds that we track rose by six during the fourth quarter, Electronic Arts Inc. (NASDAQ:EA) emerged as the most popular gaming stock heading into 2016. Unlike the double-digit losses registered by Activision Blizzard, Inc., shares of Electronic Arts Inc. (NASDAQ:EA) have fallen by only 6% this year. However, a few analysts feel that the chances of them falling further are higher compared to Activision’s, because Electronic Arts is currently trading at a trailing P/E of 34.10, which is rather expensive. For its fourth quarter of fiscal year 2016, analysts are expecting the company to report EPS of $0.43 on revenue of $890.37 million, while for the same quarter of the previous financial year it reported EPS of $0.37 on revenue of $896.00 million. Both D.E. Shaw and billionaire Stephen Mandel‘s Lone Pine Capital reduced their stakes in the company by 27% during the fourth quarter.

Disclosure: None