Investing in Video Game Stocks: A How-To Guide

2011 was a big year for the video game industry. Activision Blizzard's (NAS: ATVI) Call of Duty franchise released "Modern Warfare 3," grossing a record-breaking $400 million on the first day.

Facebook games developer Zynga (NAS: ZNGA) debuted onto stock exchanges with a highly anticipated initial public offering, or IPO.

And Electronic Arts (NAS: EA) stock rose over 30% as it released "Star Wars: The Old Republic" and entered into social media with games like "The Sims Social."

Despite the lingering effects of the recession, the video game industry is seeing impressive demand. If you're interested in investing in video game stocks, here are some things to keep in mind when comparing companies:

  1. Recent stock performance: Stocks that have been going up in value may continue to do so as more investors agree with the positive sentiment, whereas poorly performing stocks probably have some headwinds investors are concerned about. But investors can get carried away -- if they are too negative on a company, eventually the stock will rise to correct its price to its "true value."

  2. Who's buying (or selling) the stock: There are certain investors that must report when they buy and sell stocks. One group is institutional investors, which include hedge fund managers and mutual fund mangers. They are considered "sophisticated investors" whose experience and access to research makes their trade decisions interesting to the rest of the market. If they are buying a stock, it is probably for a good reason, although keep in mind there is usually a time lag between when they purchase a stock and when they report that purchase.

  3. What products are coming out, and on what platform: Do you think Facebook will continue to be a solid platform for Zynga? Will Activision's "Diablo 3" sell as well as everyone thinks, or could it possibly beat estimates? These are important questions to ask when considering a video game maker.

Business section: Investing ideas
To help you in answering some of these questions about video game stocks, we ran a screen on the industry for stocks seeing the highest net purchases from institutional investors over the last three months. ("Net purchases" are the number of purchases less sales.) We express this number as a percent of the share float, or number of shares trading on the stock exchange, to standardize it.

Do you think these stocks are poised to do well in 2012?

List sorted alphabetically. (Click here to access free, interactive tools to analyze these ideas.)

1. Activision Blizzard: Publishes online, personal computer (PC), console, handheld, and mobile games of interactive entertainment worldwide. Net institutional purchases in the current quarter at 18.6M shares, which represents about 4.1% of the company's float of 453.28M shares.

2. (NAS: CYOU) : Develops and operates online games in the People's Republic of China. Net institutional purchases in the current quarter at 321.9K shares, which represents about 3.21% of the company's float of 10.04M shares.

3. Shanda Games (NAS: GAME) : Engages in the development and operation of online games in the People's Republic of China. Net institutional purchases in the current quarter at 4.0M shares, which represents about 5.7% of the company's float of 70.22M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.

Data compiled by Eben Esterhuizen, CFA. Kapitall's Alexander Crawford and Alexander Crawford do not own any of the shares mentioned above. Institutional data sourced from Fidelity.

At the time thisarticle was published The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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