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#1
08-30-2007, 11:51 AM
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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. 
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#3
08-30-2007, 06:46 PM
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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.
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#4
08-30-2007, 07:16 PM
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Re: Two promising equities!
[ QUOTE ]
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. [/ QUOTE ] 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.
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#6
08-30-2007, 08:06 PM
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Re: Two promising equities!
[ QUOTE ]
This is pretty poor analysis. [/ QUOTE ] Hmm... it wasn't meant to be much of a conventional analysis. Just thoughts on these two stocks. [ QUOTE ] Can I get some numbers here besides just the word "decrease"? [/ QUOTE ] 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.
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