Video game stocks were big winners earlier this year during the coronavirus market recovery as investors bid up companies that provided entertainment offerings for cooped-up consumers during the pandemic. After several months of trading sideways, the group looks primed for a second wave of buying as people spend more time at home this holiday season amid rising infection numbers.
- Video game stocks may see a second wave of buying as people spend time at home this holiday season.
- The VanEck Vectors Video Gaming and eSports ETF (ESPO) closed above its 50-day simple moving average (SMA) Thursday.
- GameStop Corp. (GME) shares have formed a symmetrical triangle over the past month, indicating further upside continuation.
Furthermore, a follow-on $1,200 stimulus check arriving in time for the holiday sales period would be a boon for the industry. Although Democratic and Republican lawmakers have locked heads about the size and scope of a relief bill, both parties appear to support sending out another stimulus check to qualified Americans.
Below, we take a closer look at an exchange-traded fund (ETF) that specifically tacks the video game industry as well as one of the leading retailers in the space. We'll also analyze their charts using technical analysis to identify possible trading plays.
VanEck Vectors Video Gaming and eSports ETF (ESPO)
Launched two years ago, the VanEck Vectors Video Gaming and eSports ETF aims to provide similar investment results to the MVISA Global Video Gaming & eSports Index. To qualify as a component of the underlying index, companies must generate at least 50% of their revenue from gaming-related industries, including game development, gaming-related software or hardware, and streaming services. Well-known names in the fund's top 10 holdings include Tencent Holdings Limited (TCEHY), Nintendo Co., Ltd. (NTDOY), and Activision Blizzard, Inc. (ATVI). Trading costs are competitive for a niche fund, with a daily turnover of nearly $10 million in dollar volume on an average nine-cent spread. As of Nov. 20, 2020, ESPO controls net assets of $558 million, yields 0.14%, and is trading 65.43% higher on the year. Over the past month, the ETF has gained 3.16%.
The share price trended sharply higher between March and September but has remained range bound since. Gaming bulls returned to the ETF Thursday, closing price back above the 50-day SMA. Moreover, a recent cross of the moving average convergence divergence (MACD) line above its signal line indicates a return of bullish sentiment. Those who buy here should consider using the 15-day SMA as a trailing stop to book profits. To use this strategy, remain in the trade until the price closes below the indicator.
GameStop Corp. (GME)
GameStop operates as a multi-channel video game, consumer electronics, and collectibles retailer in the United States, Canada, Australia, and Europe. The video games strip mall retailer has come under mounting pressure to reinvent itself in recent years as the industry moves to streaming downloads and mobile gaming apps. To combat this shift, the company has beefed up its online offerings and focus on new-generation consoles. This month's release of Microsoft Corporation's (MSFT) Xbox Series X and Sony Corporation's (SNE) PlayStation 5 (PS5) bode well for the retailer, given that sales of video games and equipment historically surge following highly anticipated console launches. GameStop stock has a market capitalization of $806.9 million and is up over 100% year to date as of Nov. 20, 2020. However, it has pulled back by around 10% over the past month.
After breaking out from a broad double bottom pattern on increasing volume, the shares have formed a symmetrical triangle over the past month, indicating further upside continuation. Traders who buy at these levels should think about using the measured move technique to bank profits. To do this, calculate the distance in points of the leg higher preceding the triangle ($12) and add that amount to the pattern's top trendline ($12.30) to set a profit target. For instance, add $12 to $12.30 for a profit target of $24.30. Protect trading capital with a stop-loss order placed under the low of the triangle at $10.36.
A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor's loss on a position in a security.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.