Two promising equities!
 

I'm posting this to offer my ideas about my main 2 positions, and to hopefully generate some discussion that might make us all better investors.

I've read somewhere between 20-25 finance/investing books, although I still consider myself a beginner. The gist that I took away from the most successful investors (Buffett, Lynch, Soros) is to invest in what you know. I know both of these companies' products very well, and feel that they have good growth prospects over the next few years.

One of my stocks is hated by wall street, the other loved.

My first pick: Take Two Interactive (TTWO).

About 2 months ago, this stock was trading around $18/share. It then dropped a crapload because of an announcement that its biggest IP - Grand Theft Auto - will be delayed a quarter. A drop of 30% isn't warranted from a valuation perspective - that's why there's value here.

30%?!?! Think about that figure, and then truly consider if you would discount a company just because of a short term decrease in earnings. I wouldn't. And here's why:

I know I'm in the vast minority here on wall street, but whenever I hear of a delay like this, I see it as a positive sign. If I was running this company and had a franchise as strong as GTA, I would nurture it. An unfinished or poorly reviewed game released on the holidays will sell much less than a classic in the spring. What a lot of Wall Street doesn't realize is that this is the value driver of the industry, rather than meeting release dates. For examples please see Blizzard and Diablo II (you can't even count the number of delays it had) and Valve and Half Life 2 (Valve refuses to give out release dates).

To me this signals that the new management is truly concerned about the long term success of the business rather than just meeting short term earnings pressures. TTWO has a few of the most successful IP's in the industry: GTA, Midnight Club, Civilization, now Bioshock. And it's trading (~1.1Bln) at a fraction of its main comptetitors' (ATVI ~5Bln, ERTS ~15Bln) valuations. It's not the best company in the sector, but it's definitely the most out of whack in regards to price. Inefficiency in the market = profit.

Cliff's notes: New management + awesome developers + stock market drop not related to true value = profit

My second: Lifeway (LWAY).

Lifeway makes kefir, a yogurt based drink that is just taking off in America. It trades at a high P/E now, but I believe it's a good prospect, because its sales are booming, and if the trend continues, will continue to boom.

It's the largest kefir maker in the country - but here's the thing.. noone in America knows about kefir yet, outside of Chicago and the several markets they've penetrated. This is where their growth prospects lie. This past year, Quarterly profit rose 86% YOY, and revenue rose 53% YOY. I've been a shareholder for a little over a year because this company has simply awesome marketing. In Chicago I've heard radio ads for the product for a little over a year, and have seen it blow up from a few select stores to almost all grocery chains. There's no reason they can't duplicate this in other markets. Their biggest problem right now is, in fact, not being able to make enough kefir. Nice problem to have!

Cliff's notes: Kefir is yummy, both for me and my portfolio

This post is so long.. sorry. I hope it gets someone's thoughts rolling on investments, though. If you're looking for companies to invest in, at least give these two a look.

Re: Two promising equities!
 

No [img]/images/graemlins/heart.gif[/img] for my stocks, huh?

I'm not pumping, I promise... noone has any thoughts on these things?

Re: Two promising equities!
 

TTWO: Heavily dependent on the GTA franchise. Yes, they're trying to diversify, but this is the 800-pound gorilla. How much longer is it going to be popular? Most game franchises, other than licensed sports simulators, peter out after 2 or 3 releases. GTA is coming up on its 5th. Not to say this won't be a huge seller, but you can't expect it to continue forever.

LWAY: I'll have to taste kefir. I'll see if they have it at Trader Joe's tonight.

Re: Two promising equities!
 

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30%?!?! Think about that figure, and then truly consider if you would discount a company just because of a short term decrease in earnings. I wouldn't.

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Can I get some numbers here besides just the word "decrease"? If GTA represents a significant portion of their earnings, then 30% can be reasonable. I'd like to know how much exactly. Also, Valve almost went under trying to get HL2 out the door. I believe Gabe had to finance the project out of his own pocket trying to get the game out the door.

I also don't think there's any guarantee that future versions of GTA will continue to be as profitable for TTWO as the cost of development continues to rise in order to develop these complex games. It's an assumption, but I think it's safe to say that the increase in complexity and costs isn't directly translating to increase in sales.

Re: Two promising equities!
 

This is pretty poor analysis.

Re: Two promising equities!
 

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This is pretty poor analysis.

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Hmm... it wasn't meant to be much of a conventional analysis. Just thoughts on these two stocks.

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Can I get some numbers here besides just the word "decrease"?

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It materially affects their Q4, and it is a huge change to any quarter. Over the lifetime of the firm, though, my argument was that it is actually a pretty neutral change, and while it seems like bad news on the surface, it indicates a management that isn't afraid to miss one qurter's earnings if it means the company is better off in the long run.

I agree that TTWO is heavily dependent on GTA, but they've also acquired an impressive number of studios with top talent... Firaxis and Irrational being two prime examples. I don't mean to argue that it's a great company by any means, but that the market may be taking a harsh enough view of the company by now that it might be a good time to buy. New management has a good track record and is just settling down - my case is that the market is punishing them for a mistake that isn't really a mistake.

I mean... the question is all about valuation. I don't have any firm numbers, and without knowing the cost structure of TTWO I think it's impossible to be accurate in this regard - this is all based off of my 'feel' based on the relative valuations of the firms in the sector - ATVI, THQI, and ERTS. It's all a matter of valuation. At what point would you naysayers consider buying this company? 800m? 500m? I simply think the value of all its assets exceeds its current market cap by a fair margin.

Good point about decreasing profits from GTA. I definitely think this iteration will bring less profits than the last one.

Re: Two promising equities!
 

Lifeway kefir is pretty damn good, it's basically like a mix between yogurt and a smoothie.

Re: Two promising equities!
 

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Lifeway kefir is pretty damn good, it's basically like a mix between yogurt and a smoothie.

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What's preventing another company from duplicating this?

Re: Two promising equities!
 

What caused the big gains by Lifeway today?

Re: Two promising equities!
 

I have no idea. No news of any kind, and no rumors that I know of. Wondering the same thing myself!

update/variance/brag:

TTWO: 39.8% return
LWAY: 85.9% return

Re: Two promising equities!
 

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Lifeway kefir is pretty damn good, it's basically like a mix between yogurt and a smoothie.

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What's preventing another company from duplicating this?

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Nothing. And Lifeway sucks as a company. They got all their money from dominating the barren Russian / eastern euro foods market by through heavy overpricing in specialty stores. They would have gotten destroyed in any supermarket, which is what will happen with kefir.

And finally, the russian way of doing business has never scaled into the US, and never will. Cutthroat efficiency and presence of laws are the 2 biggest differences. For the next 10 yrs at least, investing in Russian managed companies that do consumer-based business in developed economies will not be a good play.

Re: Two promising equities!
 

It may very well happen as you say. But Lifeway is no stereotypical russian company - in fact, judging by their marketing (radio ads, packaging), which seem very 'americanized', I'd say they are adapting to our way of business really well. In food, packaging is almost as important as taste, and they have that part of the business nailed down. Their ProBugs product seems to be selling well, targeted at kids, and so are their flavored kefirs.

As far as replicating kefir, other companies can certainly do that - but kefir isn't a product like milk. I've tasted other kefirs in the Chicagoland area and imo they're not nearly as good as Lifeway's. They're in the same price range, and have worse packaging/marketing.

Re: Two promising equities!
 

Hmm. This is really weird that LWay has jumped almost 19% today with no releases or rumors that I know of.

I guess there is speculations that its sep 07 earnings report is really good?

Re: Two promising equities!
 

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No [img]/images/graemlins/heart.gif[/img] for my stocks, huh?

I'm not pumping, I promise... noone has any thoughts on these things?

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Lol, at the thought of pumping on 2+2 forums.

Re: Two promising equities!
 

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It may very well happen as you say. But Lifeway is no stereotypical russian company - in fact, judging by their marketing (radio ads, packaging), which seem very 'americanized', I'd say they are adapting to our way of business really well. In food, packaging is almost as important as taste, and they have that part of the business nailed down. Their ProBugs product seems to be selling well, targeted at kids, and so are their flavored kefirs.

As far as replicating kefir, other companies can certainly do that - but kefir isn't a product like milk. I've tasted other kefirs in the Chicagoland area and imo they're not nearly as good as Lifeway's. They're in the same price range, and have worse packaging/marketing.

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Don't get me wrong, I'd certainly be long the company for the medium term vs. the S&P or whatever other benchmark. The short is for the long-term. All the things I mentioned are not going to come out until at least 1-2, probably 2-3 years, provided that kefir as a product does take off -- and in the meantime, the stock could go to 100 if right now they do indeed have the best tasting and marketed product. If you believe thats the case, go long for now.

Re: Two promising equities!
 

It's time for an update bump!

At $18.06, a few dollars above my first recommendation, TTWO is still very undervalued.

The market is slowly beginning to align with my suppositions from the last few months: TTWO's killer developer lineup and its approach to game development, coupled with cost cutting programs by new management makes for a company that has very bright prospects... certainly brighter than the measly price:sales it sells at now.

TTWO: 1.35/1.07 = 1.26
ATVI: 6.48/1.51 = 4.29
ERTS: 18.46/3.09 = 5.97

Yes, this is only one metric, and I am well aware that the ATVI and ERTS could be much more profitable from those sales than TTWO. That's how it has been in the past... but that's not how it will be in the future. The most significant drivers of this profitablity change are the new management and the maturation of TTWO's major investment from a few years ago: its sports franchise.

Sports profitability: 2k sports, TTWO's sports brand, is expected to be profitable starting next year. All Pro Football 2k8 was a travesty, but NBA 2k8 is schooling EA Live 08 on every system... It's also very possible that the next time licensing for the NFL rolls around, TTWO will be able to grab a piece, and produce a valid competitor to Madden.

New management: The stock is free from the fraudsters of the past. Feder and Zelnick are reputable, and focusing to rid TTWO of unprofitable divisions and to move past the various scandals of the past.

Short interest: A nice short term bonus... if my feeling about the valuation of the company is correct then I might be getting an extra x-mas present. Short interest is about 32 million shares out of a total of 74 million. A few positive catalysts and I'll be singing short squeeeeeeeeeze.

The media has been touting that Bioshock has been a complete surprise - its success is definitely a surprise to those unfamiliar with the industry. But the surprise cuts to the very heart of why there is value in this company - most of Wall Street is too blinded by the controversy to see the true value driver behind TTWO - the lax, developer friendly approach missing from the red-tape laden, release date committed ATVI and ERTS - the approach that led to Bioshock, and the approach that will lead to many more 'surprise' hits.

Like I said in the OP, the market shunned TTWO for delaying GTA IV... the market punished a game publisher that has irregular earnings. Sorry, folks, it takes good products to make money in this industry, and sometimes you need to delay a product to make more money than you would have. I'd rather take higher expected sales and better managed brands than pretend that my company has the predictability of a utility. As the market begins to become aware of TTWO's potential, I expect the P/S to rise to more reasonable levels.

Anyway, I know I'm probably very outspoken on this equity, but I've done my research, and never before have I been more sure of a company's value... overconfidence is the bane of the investor or speculator, but there are few industries with which I am more familiar than the gaming world.

That said, I'd like to hear any dissenting opinions.