By Rahul Jacob

(FORTUNE Magazine) – Not many stocks look like bargains when they trade at more than a 60% premium to the market's P/E. But consider Toys ''R'' Us. Clark Winslow, who manages $1.2 billion in equities for Alliance Capital Management, thinks the stock is undervalued because sales at company stores that have been up and running at least 18 months sagged 3.7% on average in the past two quarters. But with the recession seemingly over and last year's industrywide Christmas discounting ! unlikely to be repeated, Winslow expects earnings to bounce up 22% in 1991CK. The stock traded recently around $36, 22 times his estimate of 1992 earnings. He looks for the price to increase to $42 within the next 12 months, so he has been adding to his already sizable million-share stake. Christmas may come early at Toys ''R'' Us this year, thanks to a new 16-bit Nintendo machine that retails for a pricey $199. It was introduced at most of the company's stores in August. Says Michael Goldstein, vice chairman of the $5.5-billion-a-year retailer: ''We're so excited about it that we used air cargo to get it to some of our stores, which we do with maybe one in 10,000 products.'' Says Paine Webber analyst Margo McGlade: ''Any kid who plays with Nintendo knows about the new machine. Nintendo has created a huge demand for it.'' She recently upgraded Toys stock to a buy. At Dean Witter Reynolds, analyst Donald Trott thinks adults will bite too. Adults bought -- for themselves -- 48% of the Nintendo hardware sold between mid-1989 and the end of 1990. Software for the new machine costs about twice what it does for the older eight-bit model, so margins should be plumper. McGlade expects Toys' 23% share of the U.S. retail toy market to increase to a commanding one-third or more by 2000. Two money-losing rivals, Child World and Lionel, will be increasingly vulnerable. Toys has been looking abroad for growth. Trott thinks that by the mid-1990s it will be starting up more outlets abroad than in the U.S. Over the next five years, McGlade is betting on a 32% annual growth rate in international sales and 39%-a-year increases in foreign earnings.