Investment Update $TTWO – Taking Off Long Stock for 10%+ Gain

by Enis February 26, 2014 9:58 am • Commentary

TTWO was a favorite stock of ours to start 2014 for two main reasons – cheap valuation, and a great lineup of games.

Since our purchase 6 weeks ago, the stock has gone up more than 10%, though it’s been a rocky ride in that period.  In fact, the stock sold off from above $19 to below $17, and is now back above $19, all in the span of a month:

TTWO daily, 200 day ma in yellow, Courtesy of Bloomberg
TTWO daily, 200 day ma in yellow, Courtesy of Bloomberg

After bouncing off its 200 day moving average after earnings, the stock is hanging above its August high of $19.25.  However, the stock has been unable to hold above its pre-earnings high of $19.68, and is trading below that level again today after making a run above $20 yesterday.  With TTWO testing the August breakout level for the 3rd time in the past week this morning, we’re going to lock in our 10%+ gains here rather than wait around to see how this one plays out.  A move back to the $17-$18 range and the rising 200 day ma might be the spot for another long entry.

Action:  Sold TTWO at $19.46 for a $2.06 gain, or a 11.8% gain


Original Post, January 13, 2014:  New Investment – Going Gaming

Here’s the next addition to our investment portfolio:

We took a Deep Dive look into TTWO almost a month ago.  Take Two Interactive has been a frustrating stock for investors over the past decade, essentially trading higher and lower and ending up in the same place as it was 10 years ago, on a very volatile earnings stream.  However, we saw a couple reasons for more optimism going forward:

1)  Management has been much better since TTWO’s 2007 accounting scandal.  Zelnickmedia, led by Co-Founder Strauss Zelnick, was at the head of a takeover of the company along with other large investors.  Mr. Zelnick has been Chariman and CEO since January 2011, but heavily involved since 2007.

2)  The company’s library of content is the best in the industry, as cited at the start, but more importantly, management expects annual profitability for the foreseeable future (as a result of that much more flexible library of content).

Management gave one more recent signal of their own confidence in the company’s prospects.  TTWO bought back Carl Icahn’s $200 million stake in Take Two at $16.93 per share in November.  Carl Icahn’s exit caused investors to initially react negatively to the news, but the stock quickly rebounded as management repeatedly communicated that the buyback (one of the largest in years for the company) reflected an outlook for record results in 2014, and continued non-GAAP profitability every year for the foreseeable future.

Here were the concluding thoughts in the Deep Dive post:

TTWO is only a $1.7 billion market cap company, even though it might be the leading video game publisher in the market today.  The company’s past hiccups have hurt its reputation, but current business results and the future forecast are quite bright.  If TTWO does indeed earn 1-3 dollars per share in the coming 2-3 years, this stock is significantly undervalued.  We are considering it for addition to the long-term investment portfolio given what looks like asymmetric risk/reward to the upside.

Given our research and the overall valuation, we’ve been patiently waiting for a good entry on the stock for a longer-term position to express our view.  On a long-term basis, the $16-$17.50 area (marked by green lines) is an important area of prior resistance that we expect to act as support:

TTWO daily, Courtesy of Bloomberg
TTWO daily, Courtesy of Bloomberg

On a shorter-term basis, the largest volume days ever since the Icahn announcement low over the past couple months have generally been on moves higher (volume circled in green below).  In addition, the stock has fallen back to within 1% of its 50 day moving average, and is only 5% away from the rising 200 day moving average:

TTWO daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
TTWO daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

We bring all of the technicals up to explain why we decided to enter the long position today.  However, we plan to hold the TTWO position for many months to let the valuation thesis play out, not as a short-term trade based on technical thoughts.

TRADE: Bought TTWO for $17.40

Earnings are in early February.  We might provide an update to the position before then if we decide to do any protection or leverage structures in the options ahead of earnings.