Overvalued companies are everywhere these days. Gamestop (GME), however, is not one of them. It looks like a good deal to me at these levels. Disclosure: I recently bought GME.

If you aren’t familiar with the company, they operate a huge chain of retail video game stores. And they just reported a solid quarter, beating expectations. They were able to buck the market’s down-trend late in the week.

A particularly profitable part of their business is used games. Games have a limited shelf-life for individual players. When they get bored, GameStop offers a convenient place to sell them. But the store only pays $3 to $15.

GameStop can turn around and sell the same game at a $5 discount to new ones. Used games in high demand fetch $45+ retail. There’s no real risk to buying used games, other than scratched disks. But GameStop offers refunds for bad games.

This part of their business is the fastest growing, and has the highest profit margins. It grew 19% YoY in their latest quarter.

The used game market is clearly a good place to be during a recession.

Call of Duty Boost

Call of Duty: Modern Warfare 2 sold a mind-blowing $550 million in the first five days after release. GameStop stores all over the nation held midnight release parties. Safe to say, GME will be a big beneficiary of this release.

Q4 is always a critical one for Gamestop. The majority of their yearly profits come during the holiday quarter. Many worried that consumer spending would punish retailers like GameStop. But consumers seem to be spending as recklessly as ever, and it could go on for a while.

With the boost from Call of Duty, I think Q4 will be a good one.

As I’ve said here many times, being short is dangerous in markets like this. And yes, I realize the irony of Bearish News doing a piece on long stocks. Such is the crazy world we live in.

Though the market fundamentals look bad, fighting the strong forces pushing the market up is silly. See May’s Deck is Stacked Against Shorts piece. It’s important to not fight these moves (for long at least). I hold short positions, and try new ones out every so often — but always with stops in place.

I also try to find longs with a good risk-reward, and think GameStop is one such stock.

Gamestop Stats:

Trailing P/E: 11.02
Forward P/E (estimate): 8.7
Cash: $197m
Debt: $495m
PEG Ratio (5 yr expected): 0.68