Stock talk for the main street investor.
Dec 29 2009

Activision – Best In Gaming

The gaming industry has gone through fascinating growth over the last 20 years. When I got a Nintendo as a Christmas present in 1987 it was the coolest, most advanced gaming system ever. And the track pad made it even more incredible.

Today, the characters are more realistic (I caught myself doing a double take at Best Buy last week when I thought an NBA video game was a live game), programming is more complex and gaming systems fight to grab our attention. To analyze the industry we have to take a look at where it is going…

Industry Future:

- Like most media the gaming industry is likely to move to a download business model. Possibly operated on remote servers that can be accessed anywhere in the world. This makes me think the retail gaming market, dominated by Gamestop (GME) and big box retailers like Best Buy is an area I want to stay away from. They’ll be innovated out of the market.

- As of today consoles are the brain power of the gaming market. But even though they’re the brain they’re often sold at a loss by manufacturers Microsoft and Sony. Threats from “cloud” gaming could reduce our dependence on the console itself, rendering manufacturers even more helpless. It’s not likely they will be replaced all together any time soon but it is likely their power in the industry will remain low.

- This leaves us the middle man in the market. The content provider. And without them there is no game. They can develop their games for multiple consoles and sell them in any retail outlet including download form. They have by far the most power in the industry. So the key is to create content that gamers will demand. The more demand the higher margins go.

This is why Activision is the best in the gaming market. They simply have the best content. And they’re innovating around existing content. The recently released DJ Hero (which I’ve been addicted to the last few days) proves they can still innovate. Established franchises such as Starcraft, Call of Duty and World of Warcraft provide an extremely solid base for future growth. The challenge is creating the next great franchise. Something a formerly dominant Electronic Arts (ERTS) has failed to do. I think the diverse product base will help ATVI from following the same path.

Their forward P/E of 14.5 is reasonable although I would like to see a better value. If holiday sales fall short of projections it could be a great entry point under $10. But today’s close of $11.28 isn’t a terrible price.

Disclosure: The Author does not own ATVI, GME, ERTS or BBY.

Dec 28 2009

Apple’s Latest Hype

The hype around Apple (AAPL) lately has been about a possible tablet they’re supposedly developing. To me a tablet seems like a very low impact product unless it can be sold for a price Apple will never reach, like $299. Being that’s what an iPhone sells for I doubt a new tablet will be such a low price.

If anyone can make a market out of tablets Apple’s a great candidate. They could leverage the iTunes Store and the reading apps could be improved to work with the tablet but I’m not seeing them growing earnings more than low double digits because of a tablet. And wouldn’t that cannibalize Mac sales?

What I think the hype should be about is the still floundering Apple TV. This is the best chance Apple has to make a game changing products. If Apple can add a little functionality:

1. DVDR/W – Ability to read a write DVDs. If I’m going to spend money on an HD movie I’d like it to be portable and usable after I throw out my Apple TV.

2. Cable DVR – Someone has to get us off the monopoly cable companies and their DVR players have. If this functionality materialized I would be the first one in line.

Rentals and HD purchases have already been added since Apple TV was introduced. It’s just looking for the push over the edge to becoming main stream. A cable TV subscription rumored a month ago could be another option. As could a TV with Apple TV functionality built in.

No matter what they introduce in January I think the stock has gotten very expensive. Apple’s current market cap is approaching $200 billion. Only a handful of companies are that large. It puts a big target on their chest in a challenging industry. I’ve been selling Apple shares over $200. I think it’s a great time to cash in some nice gains, although it pains me to sell a great company.

Disclosure: The author owns AAPL.

Dec 21 2009

The Next Bubble

Asset bubbles always sound like a great idea on the way up. Remember when dotcoms were the next best thing. When they blew up we lowered risk by investing in the safest investment around… real estate. How did that one work out?

It wasn’t that these investments had a poor thesis to begin with. After all, the internet is just starting to realize it’s potential, and it’s true, real estate is a relatively safe tangible asset long term. The problem arises when a stampede starts running in the same direction the thesis starts to lose it’s value. Fundamentals that began sound and rational get out of control.

Lets go through the two main thesis the gold rush is built on.

1 – Inflation Hedge: This is one of the great lies of investing. Gold is not an inflation hedge and never has been. In 1983 gold was just over $500 an ounce. In January the CPI was 97.8 and today it’s 216.33. That means gold should have followed an almost straight line path from $500 to $1106. But instead it lagged through the 90s and early 2000s before gaining almost 400% in the last eight years.

The truth is, gold’s last major run-up was just BEFORE inflation hit in the early 80s. Gold didn’t keep pace with inflation and actually fell when inflation was double digits from 1979-81.

2 – Hedge Against The Dollar: This might hold a little more weight but if you’re worried about the value of the dollar why not hedge with Euros or Yen? Or you could invest in foreign equities or bonds. Aren’t these more direct hedge?

One way to short gold in this market is to own DGZ a short gold ETN from PowerShares. I’m seriously considering this for my portfolio.

Dec 21 2009

Mayor’s Back

Well we’re starting all over because the site was hacked but we’re finally back. Stay tuned for posts about stocks in coming days.