The broader market has put together a solid game for bulls over the past week and change. But if bullish traders wish to score near or longer-term, gaming stocks Electronic Arts Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) are winners worth putting some coin into.
Since shortly after the Brexit, it has been nothing short of a great game for the S&P 500. But it has been an even stronger game winner for both EA and Activision.
For its part, the S&P 500 is right back where it started after crashing lower by nearly 5% over two “game changing” sessions — or so they told us with alarmist cowbells going off in the background.
Over the same time, EA and ATVI are showing solid relative strength with gains of around 14%. And looking forward, it doesn’t look like a “game over” situation for either.
Given the secular growth story in an established but still booming gaming industry, as well as technically bullish platforms for these two industry titans, it’s time to play both EA and ATVI with options strategies which take aim offensively and maintain a strong defensive line.
Game Changer No. 1: Electronic Arts Inc (EA)
EA is huge in the gaming industry. The company is behind the popular FIFA and Madden NFL titles and has enjoyed massive success with its first-person shooter “Battlefield” series, as well last year’s “Star Wars Battlefront” which increased the company’s customer base by an estimated 15%.
Shares of EA aren’t exactly cheap with a price-to-sales ratio in excess of 5. However, EA does make coin, saw earnings grow by more than 125% year-over-year, sports a not-too-steep forward price-to-earnings ratio of 19 and has a nice cash position.
And with a return of equity of about 36% and estimated future growth of nearly 15%, EA looks like a winner off the chart.
EA Stock Technical View
On the price chart, shares of EA also look attractive for bullish positioning. Aside from its relative strength the past couple weeks, EA has put together an eight-month corrective base.
More recently and confirming the bullish pattern, EA has hit fresh all-time highs by a narrow margin while forming a high handle — or short, flat base pattern a few weeks in length.
Given the size of pattern, I’d estimate a breakout could lead to gains of around 15% to 20% in EA stock over the next couple to few months, if the overall market is able to maintain its composure.
EA Bullish Strategy
Reviewing the EA options board, the September $82.50 / $85 bull call spread is attractive. Priced around 65 cents, the vertical takes in a profit of $1.85 above $85 — or a return of 285% — at expiration.
Maximizing the spread’s profit does require EA to move up by 11%. However, given our upside forecast and earnings slated for August, both sufficient time and a catalyst are potential supports.
And if it happens that it’s “game over” for EA — this lower price, softer delta position delivers a solid defense compared to being long stock.
Game Changer No. 2: Activision Blizzard, Inc. (ATVI)
Activision is another gaming industry kingpin with titles like “Call of Duty”, “World of Warcraft” and “Destiny” having legions of followers willing to shell out upwards of $60 for new titles in those series.
On paper, ATVI appears a bit pricier than EA, but no real red flags to speak of. What’s more, a couple recent acquisitions could lead to an alternative reality of Activision shares being cheaper than they appear.
In 2015 Activision bought King, the maker of “Candy Crush Saga.” With its mobile audience now nearly 500 million, the acquisition opens up a huge pool to market its games to.
A separate purchase of esports provider Major League Gaming is another potentially large boon for ATVI.
Esports pit gamers against one another in various games and the audience for this type of activity is growing fast. Sales of $325 million in 2015 expected to increase by 43% in 2016.
And while EA also has a piece of the action, the brand-name acquisition should serve Activision particularly well in this up-and-coming market segment.
ATVI Stock Technical View
Technically and much like EA, shares of ATVI are displaying relative strength within a more suspect, rally in the broader market.
Similarly, ATVI has formed a corrective, albeit deeper cup base that’s capped off with a bullish handle or short, flat base. In the case of ATVI though, relative strength this past week has already led to a modest breakout and fresh all-time-highs.
As with EA, 15% to 20% upside in ATVI doesn’t appear unreasonable with the caveat of the market not throwing in the surrender flag to bears.
ATVI Bullish Strategy
Once more, a softer delta and more conservative price target for spread positioning in ATVI makes sense in our opinion.
Reviewing the ATVI options board, the weeklys August 26 $41.50 / $45 bull call spread is a nice trade-off between risk and reward.
Priced for about $1.10 with ATVI at $40.35, this vertical can return 220% or $2.40, if shares rally by about 10% into expiration and a couple weeks past Activision’s scheduled earnings release.
Bottom line though, if an offensive strike isn’t waged by ATVI bulls in conjunction with proper sizing this defensive strategy will let traders live to fight the next battle.
Investment accounts under Christopher Tyler’s management currently own ATVI calls. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.