Every week in this column, I go for the kill on a susceptible company. I hammer its valuation and its proposed catalysts. Doing so doesn't make me very popular, but I'm not doing this for style points.

Bears beware, though. After I'm out of ammo, I move in for a group hug. I suggest three stocks that should outperform the loser that I'm scorching.

Who gets tossed out this week? Come on down, Electronic Arts (NASDAQ:ERTS).

Don't get mad, get Madden
This isn't the first time that I've heaved EA into the trash. I singled out the video-game giant back in April.

Now, before you begin dreaming about what the past five months of rallying markets have done to fatten EA's share price since my bearish missive, hold back on the "I told you sos." EA shares closed at $19 when I wrote my mid-April column. The stock is trading marginally lower today.

This doesn't mean that EA offers a relative opportunity to appreciate, either. There's a reason EA shareholders have missed out on one of the most powerful rallies in generations. The video-game industry in general -- and EA in particular -- is in a funk.

Sector tracker NPD Group claims that hardware and software sales sank for the fifth consecutive month in July.

Ouch! Recent console price reductions on Xbox 360 and PS3 systems will help drum up interest as we head into the holidays, but the landscape itself is changing.

The same software developers that used to crank out $60 games are now having to settle for $5 to $10 releases on smartphones and Microsoft's (NASDAQ:MSFT) Xbox Live Marketplace. The leveling of the playing fields also has the video-game titans competing with home-based techie coders who are flooding the digital channels.

So games are getting cheaper, the pool of competitors is getting deeper and EA is also light on growth catalysts, since there's no reason to believe that Madden NFL 10 will sell more copies than Madden NFL 09 did last year.

Don't tell the analysts. They see EA earning $0.98 a share this fiscal year, after posting a loss in fiscal 2009. They expect the spurt to continue, with a fiscal 2011 profit of $1.27 a share.

Now, picking up a bellwether for just 14 times fiscal 2011's projected earnings may seem like a bargain, but where will this growth come from? The industry is being transformed. There will be opportunities in cyberspace, mobile, and overseas, but the field is crowded with diversions that are cheap -- if not free, courtesy of ad-supported models.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

  • Apple (NASDAQ:AAPL): EA is one of the many developers selling games through Apple's App Store for iPhone and iPod touch owners. With 65,000 apps and counting, any particular app won't have an easy time getting noticed. So why not bet on the platform itself? Apple is the real deal. It doesn't matter if most developers are giving away their programs or charging as little as $0.99 for every download. The App Store helps sell iPhones and iPods. It will also keep users loyal when the time comes to upgrade their gadgetry. Smartphone rivals Research In Motion (NASDAQ:RIMM) and Palm (NASDAQ:PALM) will cash in on smartphone growth, too, but it seems as if the world revolves around Apple's App Store these days.
  • Take-Two Interactive (NASDAQ:TTWO): The only thing uglier than the video-game industry these days is Take-Two's fiscal-third-quarter report. Profits turned to losses. A once lush product pipeline put out only three ho-hum titles during the period. However, this is also the same Take-Two that EA wanted to buy for $26 a share last year. It's trading for a little more than 40% of that price today. Consolidation is the inevitable response within a shrinking industry, and Take-Two is the most likely buyout candidate. EA or a rival should make a move on Take-Two before it returns to profitability (during the current quarter) and releases the latest installments in the BioShock and Grand Theft Auto franchises.
  • Perfect World (NASDAQ:PWRD): If stateside gaming is in a slump, why not grab a passport and get your growth game on overseas? One of the few booming gaming scenes is in the online multiplayer fantasy niche in China. Perfect World is one of the industry's fastest-growing leaders. Revenue and earnings soared by 56% and 60%, respectively, in its latest quarter. You don't have to pay up for that heady growth. The stock is trading at just 15 times this year's earnings and 11 times next year's projected profitability. Why pay a higher multiple for EA?

So don't get Madden. Get even.

Other headlines out of the weekly circular file:

Microsoft is a Motley Fool Inside Value pick. Perfect World and Take-Two Interactive Software are Motley Fool Rule Breakers selections. Apple and Electronic Arts are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz still remembers playing the early EA Sports games, like Earl Weaver Baseball and Larry Bird vs. Dr. J. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.