Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘CAB’

Activision Blizzard (ATVI) update #14—1Q10 results surge on early Call of Duty release

Posted by intelledgement on Fri, 07 May 10

Our game publishing company, Activision Blizzard (ATVI), announced 1Q10 results yesterday that materially exceeded management’s guidance from three months ago. The guidance had called for revenues of $1.1 billion and a profit of twenty cents per share in the quarter and the actual results included revenues of $1.3 billion and a profit of 30  cents per share. The good news was tempered, however, by the realization that the bounty was largely attributable to the early release of a “Modern Warfare 2” expansion kit that had not been expected until the second quarter…and ergo the boost from which shall now be missing in 2Q10. And the beat was not a surprize, as management had preannounced it last month.

CEO Bobby Kotick stated, “Our better-than-expected first quarter performance was driven by strong global consumer demand for Activision’s ‘Call of Duty’ and Blizzard Entertainment’s ‘World of Warcraft’. Activision’s ‘Call of Duty: Modern Warfare 2’ was the #1 title overall in the U.S. and Europe for the quarter, which illustrates the continued momentum of our catalogue. Additionally, during the quarter, Activision launched DreamWorks’ ‘How To Train Your Dragon’ and the ’Call of Duty: Modern Warfare 2 Stimulus Package,’ which shattered Xbox LIVE records with more than one million packages downloaded in the first 24 hours…. We expect to deliver record calendar year non-GAAP net earnings and expanded non-GAAP operating margins. In addition, we continue to strengthen our franchise portfolio and development resources for the future. Our high-quality brands, industry leading operational capabilities and solid balance sheet should enable us to take full advantage of the opportunities afforded by the expanding interactive entertainment market and allow us to deliver continued superior returns to our shareholders. As of March 31, 2010, we have delivered compound shareholder returns of 28% compared to the S&P average of -2 % over a ten-year period. We continue to find ways to add profitable franchises that allow us to increase our operating margins. In this regard we recently announced a ten-year alliance with Bungie, one of the premier studios in our industry. This relationship will allow Activision to broaden its product portfolio with exciting new games and underscores our commitment to partnering with the best creative talent in the industry.”

Management also announced that as of 31 March the company had purchased $92 million—approximately 8.5 million shares—of common stock at an average price of $10.84 per share under the $1 billion stock purchase program announced in February. Guidance for 2010 still calls for revenues of $4.2 billion including $925 million in 2Q10 and 49¢/share of earnings (up from the previously projected 47¢) including 11¢ in 2Q10.

First quarter highlights included:

  • In the quarter, “Call of Duty: Modern Warfare 2” became the #1 best-selling third-party video game of all time
  • For the quarter, “Call of Duty” was the #1 third-party franchise in the USA and Europe
  • For the quarter, “Band Hero” and “Cabela’s Big Game Hunter 2010” were top-10 titles on the Nintendo Wii in the USA
  • For the quarter, “Call of Duty: Modern Warfare 2” and “World of Warcraft: Wrath of the Lich King” were top-10 PC titles in the USA
  • 10 February—stock repurchase program announced under which the company can repurchase up to $1 billion of ATVI shares
  • 11 February—Percy Jackson & The Olympians: The Lightning Thief released
  • 2 March—Activision Publishing announced the firing of Infinity Ward co-founders Jason West and Vince Zampella and the formation of a new business unit dedicated to the “Call of Duty” franchise headed by Philip Earl with the missions of expanding the brand to new geographies and devising “new margin expanding digital business models.”
  • 23 March—Zhu Zhu Pets released
  • 23 March—How to Train Your Dragon released
  • 30 March—Cabela’s Monster Buck Hunter released
  • 30 March—Call of Duty: Modern Warfare 2 Stimulus Package released

In China, the good news finally panned out as on 12 February, Blizzard licensee Netease received permission from the General Administration of Press and Publications (GAPP) to (re)release The Burning Crusade, the first expansion released for World of Warcraft (WoW) back in January 2007. This ends seven months of uncertainty and intermittent interruptions in WoW availability on the mainland, ever since the expiration of Blizzard’s five-year deal with The9, their previous licensee. Still no word on the oft-delayed Wrath of the Lich King expansion, which Chinese WoW players have been awaiting—excepting those who have “defected” to Taiwan-based servers—for 18 months now.

Now that the China WoW contretemps winding down, we will have to content ourselves with the Infinity Ward legal warfare drama. That heated up late last month as 38 additional Infinity Ward employees sued Activision over alleged delinquent royalties. They are seeking between $75 and $125 million plus $500 million in punitive damages. This is in addition to the $36 million in royalties sought by fired Infinity Ward co-founders West and Zampella in their suit filed in March. It is unclear how many of the 38 employees involved in the second suit have left Activision, but clearly there are some morale issues in the “Call of Duty” business unit, to say the least.

In 2Q10, four games are expected to be released: the new racing title “Blur,” “Shrek Forever After” based on DreamWorks Animation’s upcoming feature film, an original Transformers game, “Transformers: War For Cybertron,” and “Singularity.” Also, in the last ten days the company announced release dates for “Starcraft II” (27 July and separately, as of 28 April the Mac beta was released and Intelledgement staff are expecting to install it imminently) and “Call of Duty: Black Ops” (30 November).

Previous ATVI-related posts:

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Activision Blizzard (ATVI) update #7—3Q09 results provide surprize profit

Posted by intelledgement on Thu, 05 Nov 09

A third straight quarter of beating guidance on the top and bottom lines—including a penny/share profit when a loss had been expected—highlighted the 3Q09 results that our game publishing company, Activision Blizzard (ATVI) announced today. Revenues for the quarter amounted to $703 million as compared to guidance of $680 million. The 1¢/share profit handily beat the guidance of a loss of 3¢/share.

CEO Bobby Kotick stated, “Our performance was driven by positive audience response to Activision Publishing’s Guitar Hero 5, Marvel: Ultimate Alliance 2, and the Guitar Hero and Call of Duty franchises, as well as Blizzard Entertainment’s World of Warcraft. Year to date through September 30, the Guitar Hero franchise was the #1 best-selling third-party franchise in North America and Europe. For the month of September, sales of music games in the U.S. increased 72% in dollars year over year, which demonstrates the sustained interest in this new and important game category. During the quarter, we continued to see strong sales for Call of Duty World at War and associated map packs, which year to date have sold more than seven and half million units…. This success is the result of our focus on delivering the highest game quality and the best entertainment experiences possible for our consumers.”

Guidance for the calendar year remains unchanged: revenues of $4.05 billion and 26¢/share. For the fourth quarter, management anticipate revenues of $1.33 billion and a loss of 4¢/share.

Third quarter highlights included:

  • Year-over-year 3Q09 U.S. market share up 3.1 points to 13.3%
  • Year-over-year 3Q09 U.S. and European combined market share up 1.2 points to 12.1%
  • Year-to-date U.S. market share of the music/dance category up 5 points over 2008 to 51%
  • Year-to-date Guitar Hero World Tour #1 best-selling third-party title in North America and in the top ten 3Q09
  • Year-to-date Guitar Hero combined U.S. and European sales for the Xbox 360(TM) and PLAYSTATION(R) 3 increased 20% over 2008
  • 3Q09 Guitar Hero #1 third-party console and handheld franchise in Europe
  • Year-to-date and Call of Duty: World at War #2 best-selling third-party title in North America and in the top ten 3Q09
  • Year-to-date Blizzard Entertainment had three of the top-five bestselling PC games in units in North America and four of the top-10 bestselling PC games in units between North America and Europe combined
  • 18 August—Wolfenstein released
  • 21 August—Cataclysm, the third expansion for WoW, announced at BlizzCon; no release date has been specified by Blizzard but according to company president Mike Morhaime, it is targeted for 2010
  • 1 September—Guitar Hero 5 released
  • 9 September—Cabela’s Outdoor Adventures released, a simulation of big game hunting, freshwater fishing and bird hunting in collaboration with Cabela’s (CAB)
  • 15 September—Marvel: Ultimate Alliance 2 released, a collaboration with Marvel Comics (DIS)
  • 30 September—as of this date, Activision Blizzard had purchased $960 million, or approximately 89 million shares, of common stock at an average price of $10.81, under its stock repurchase program since the program’s inception in November 2008

The news from China continued to be mixed…or maybe “mixed up” would be a better description. Evidently ATVI’s new licensee, NetEase (NTSE), initiated a World of Warcraft (WoW) beta test in mid-July, expecting to be able to effect a full relaunch within a week or two. However, final approval from Chinese authorities was not immediately forthcoming, and after several weeks—keep in mind that back on 7 June, WoW effectively closed down in China when ATVI’s contract with their former WoW licensee, The9 (NCTY) ran out, leaving millions of Chinese WoW games stranded offline—NetEase opened up the free beta to everyone. While expensive, this beat the alternative of having frustrated Chinese WoW “defect” to Taiwanese WoW servers—slow to access from the mainland, and requiring them to start from scratch with a new character—or to another non-Blizzard game altogether. Finally, on 19 September, NetEase relaunched WoW in China, after a hiatus of 15 weeks. And last month, NetEase announced that the long-delayed Wrath of the Lich King update—launched in the rest of the world last November—would be released in China later this month.

But then, just Monday, we received a report that one Chinese agency—the General Administration of Press and Publications (GAPP)—had ordered NetEease to stop collecting subscriptions and signing up new subscribers, accusing them of “illegal” behavior, and threatening to yank the company’s internet access. The GAPP had been reviewing the content of WoW—it is not clear why this review was undertaken, as the content is the same as what had been running in China under The9’s aegis—and possibly there was miscommunication as to whether or not that review had been completed. Or perhaps it is a political thing. Doing business in China is a trial! But never boring…stay tuned.

In 4Q09, ATVI management plan to release:

  • Bakugan Battle Brawlers™
  • Band Hero
  • Call of Duty: Modern Warfare 2
  • DJ Hero
  • Tony Hawk: RIDE

Previous ATVI-related posts:

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Dec 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Tue, 13 Jan 09

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 30.38 1,731.66 23.55% 30.78% -4.44% -2.63%
NBIX 22-May-07 158 11.33 1,798.14 3.20 505.60 2.89% -29.52% -71.88% -54.47%
GSS 19-Jul-07 451 4.19 1,897.69 1.00 329.23 36.99% -68.35% -76.23% -62.78%
GSS 24-Aug-07 613 3.08 1,896.04 1.00 447.49 36.99% -68.35% -67.67% -56.53%
BBY 19-Sep-08 -58 41.49 -2,398.42 28.11 -1,638.50 35.73% -46.61% 31.68% 165.39%
MA 19-Sep-08 -11 225.18 -2,468.98 142.93 -1,573.88 -1.70% -33.58% 36.25% 199.51%
WMT 19-Sep-08 -40 59.70 -2,380.00 54.77 -2,200.32 -1.99% 15.23% 7.55% 29.45%
CAB 19-Sep-08 170 14.08 2,401.60 5.83 991.10 -6.72% -61.31% -58.73% -95.67%
APWR 18-Dec-08 422 6.14 2,599.08 4.30 1,814.60 n/a -67.79% -30.18% 100.00%
SOHU 18-Dec-08 58 45.13 2,625.54 47.34 2,745.72 n/a -13.17% 4.58% 251.66%
cash -189.22 19,669.50
ISOP 03-Jan-07 10,000.00 24,923.44 -2.21% 14.09% 149.23% 58.12%
Global HF 03-Jan-07 10,000.00 9,340.35 0.74% -15.95% -6.60% -3.37%
NASDAQ 03-Jan-07 2,415.29 1,577.03 2.70% -40.54 -34.71% -19.25%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2008 inclusively) provides a CAGR of around 13.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 9.6%. Note that for the portfolio, dividends are added back into the value of the pertinent security—or subtracted from the value of short positions—and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance.

Transactions: The market calmed down considerably in December, and—following three consecutive months of unmitigated disaster—closed up. With the immediate risk of a financial meltdown reduced and the probability of a post-election “Obtimism” rally increasing, we liquidated our four financials sector shorts as well as our real estate short.

News:

Comments: To quote our IMSIP 4Q08 report, “Let’s hope for the best. The incumbent crew was most definitely leading us deeper into the morass; the new crew recognizes we are in a big hole…perhaps they will be smart and brave enough to stop digging. We subscribe to the injunction to make love, not war, but we still believe in being prepared for both.” Accordingly, while we do not believe it is likely we can avoid a crash, it does appear likely that the herculean efforts of the powers-that-be to paper over the cracks in the system are taking hold (for now) and that, combined with optimism that the new regime might work miracles is likely to buoy markets in the short-to-medium term. This we are still short retailers—because we don’t believe the American consumer has any spare cash or credit to spend—but have covered our financial sector and real estate sector shorts for now. Plus in congruence with our long-term belief in the prospects of China, we have filled a gap in the port with two Chinese-market acquisitions.

At the end of the month, we were -2%, the hedgies were +1%, and the NASDAQ was +3%. For 2008 overall, we were +14% while the hedgies lost 16% but still handily beat the NASDAQ, which was -41% (worst year ever!). Overall after two years since inception, the ISOP is now +149% compared with -7% for the hedgies and -35% for the NASDAQ. Please note we generally consider the purchase of individual stock equities to be speculation, rather than investment, because of the high risk associated with owning a particular stock…and we recommend that the ratio of funds under management be about 10:1 in favor of investment over speculation—which is why this speculative portfolio started with $10,000 while our Intelledgement Macro Strategy Investment Portfolio started with $100,000 back at the beginning of 2007. (Of course, speculative risk can be mitigated by owning large numbers of stocks; this is why we recommend investing in exchange-traded funds, which typically do just that.) While this order of volatility is not unusual for speculative positions, the ROI we have attained here is unrealistically high. Over 40% of our net profits after two years still derive from trading one stock and associated options—DNDN—in the first few months of 2007. So, we’ve been lucky and good so far…but it could just as easily go the other way in 2009-10.

While there was lots of macro news—mostly desperate (and ill-considered) attempts by the government to fend off immediate collapse, it was a quiet month for our stocks. Our gold miner Golden Star (GSS) was up big (+37%) mostly on a rebound in the price of gold and possibly also on an unusual lack of bad company-specific news. Vertex (VRTX) recovered nicely (+24%) from last month’s overblown concerns that the new Obama administration would be anti-biotech. Neurocrine Biosciences (NBIX), our other biotech stock, was up 3%. Of our four retailers, two were flat (Mastercard/MA and Walmart/WMT) while Cabelas (CAB) which we are long was down 7% and Best Buy (BBY) which we are short was up 36%. And despite the fact that the price of oil declined in December by 18%, our double inverse oil ETF (DUG)—instead of being up 36% as we might have expected—was down another 20%. Clearly something is wrong there. Finally, our Chinese newcomers were a mixed bag: Sohu.com (SOHU) was up 5%, but A-Power (APWR) was blown down 30% on revised guidance.

The risk of a serious downturn remains but appears to be less immediate, and consequently we reduced our short positions. Unfortunately, it still appears that the new administration is angling to establish continuity with the old one with respect to the policy of material intervention in the market to prop up insolvent “too-big-to-fail” enterprises. While we feel these policies are long-term disastrous, there is some “upside risk” should the collective wisdom of the market come to think otherwise. Generally, new political leaders get some benefit of the doubt. So we will be prepared for a “melt-up” as well. With systemic risk on the loose, the variation in plausible valuations for almost anything is very wide and consequently the risk of volatility—which reached record levels in 2008—remains high.

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Nov 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 10 Dec 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 24.59 1,401.63 -6.18% 5.85% -22.65% -14.70%
NBIX 22-May-07 158 11.33 1,798.14 3.11 491.38 -24.70% -31.50% -72.67% -57.35%
GSS 19-Jul-07 451 4.19 1,897.69 0.73 329.23 -17.05% -76.90% -82.65% -72.33%
GSS 24-Aug-07 613 3.08 1,896.04 0.73 447.49 -17.05% -76.90% -76.40% -68.07%
BZH 24-Mar-08 -214 10.99 -2,343.86 1.81 -387.34 -20.61% -95.61% 83.47% 143.57%
BAC 8-Sep-08 -69 34.73 -2,388.37 16.25 -1,121.25 -32.77% -60.62% 53.05% 581.57%
GS 8-Sep-08 -14 169.73 -2,368.22 78.99 -1,110.76 -14.61% -63.27% 53.10% 582.44%
HBC 8-Sep-08 -30 79.11 -2,365.30 54.37 -1,658.10 -7.85% -35.05% 29.90% 225.29%
DUG 10-Sep-08 56 42.83 2,406.48 30.40 1,814.51 -17.95% -15.51% -24.60% -72.89%
BBY 19-Sep-08 -58 41.49 -2,398.42 20.71 -1,209.30 -22.95% -60.66% 49.58% 717.44%
MA 19-Sep-08 -11 225.18 -2,468.98 145.40 -1,601.05 -1.64% -32.43% 35.15% 381.54%
WMT 19-Sep-08 -40 59.70 -2,380.00 55.88 -2,235.20 0.13% 17.57% 6.08% 36.09%
CAB 19-Sep-08 170 14.08 2,401.60 6.25 1,062.50 -21.38% -58.53% -55.76% -98.58%
WFC 09-Oct-08 -73 33.06 -2,405.38 28.89 -2,133.79 -15.15% -2.89% 11.29% 118.47%
cash 16,906.53 31,396.20
ISOP 03-Jan-07 10,000.00 25,486.15 2.70% 16.67% 154.86% 63.50%
Global HF 03-Jan-07 10,000.00 9,271.73 -1.67% -16.57% -7.28% -3.90%
NASDAQ 03-Jan-07 2,415.29 1,535.57 -10.77% -42.10% -36.42% -21.18%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security—or subtracted from the value of short positions—and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.

Transactions: Another crazy month in which the ISOP was a haven of sanity. Volatility was extremely high—seven trading sessions in which the NASDAQ finished up or down between 5% and 7%—but it was a bit less wild than October (when there were two days the market moved 10% or more and a third day it moved 9%). Meanwhile we stood pat…hmmm…perhaps when everyone around you is frenetically dashing about like a chicken with it’s head cut off, standing pat is no longer a reliable indication of sanity.

  • 5 Nov—paid out WFC dividend of $0.34/shr
  • 19 Nov—paid out HBC dividend of $0.90/shr

News:

Comments: If anyone was still thinking that “change we can believe in” would be any different from frontrunning for the-powers-that-be, it only took Barack Obama 20 days to put that concern to rest. The appointment of Timothy Geithner—one of the architects of the bailout under Bush aegis—is a clear signal. The import is that the new administration will be working just as assiduously as the old one—di rigueur objections from right-wing zealots that the agenda is focused on promoting socialist/statist solutions notwithstanding—to commit taxpayer money in support of the cabal of financial services leaches who crashed the system. Instead of cutting those bad boys loose and blaming the consequent chaos on W—which would have meant taking a lot of immediate pain, but also purged of the poison, a swift and healthy recovery by the economy—the Obama folks have evidently decided to take the path of least resistance and continue the policies of papering over the cracks in the walls. We can look forward to more easy credit, more bailouts of “too-big-to-fail” companies, more Keynesian stimulus, and—if this “works”—a Potemkin-village “recovery” just in time to support Democrats in the 2010 election.

Although the odds are improving, it is still not clear if the man behind the curtain can pull off the illusion that all is well again here or not. Reflecting the consequent uncertainty, the level of volatility this month was again—as in October—extremely high: an average daily change of ±3.8% as compared with the normal index change (up or down) an average of about 0.5% each day.

At the end of the month, we were +3%, the hedgies were -2%, and the NASDAQ was -11%. Another great month for the good guys! Overall after 23 months of operations, the ISOP is now +155% compared with -7% for the hedgies and -36% for the NASDAQ.

It was another heavy news month. Of our four retailers, two were flat and two were down big. Unfortunately, while we are short three of the four, the one we are long, CAB, was one of the ones down big (-21%) after reporting good 3Q08 results but providing very guarded guidance going forward. We still think CAB will shine for us in the long run. BBY was down 23%, MA was down 2%, and WMT was +0.13%, the only stock in the port to be up on the month. All four of our financial services shorts obligingly tanked: BAC -33%, GS and WFC each -15%, and HBC -8%. We did have a pang of regret over WFC’s victory over Citigroup (C) in the bidding to acquire Wachovia (WB) last month; had C won the bid, we most likely would have shorted their stock instead (we had previously been short WB) and they were down 39% this month. Actually, they were down 72% on 21 November before being bailed out by Treasury in yet another egregious misappropriation of taxpayer money. The next day—as referenced above—the Fed committed another $800 billion to bail out Fannie (FNM) and Freddie (FRE).

None of our other long positions had a good month. Golden Star (GSS) reported their worst-ever gold production costs and our patience with management is growing very thin; the stock was down another 17%. Neurocrine Biosciences (NBIX) tried making no news and that worked even less well, with their stock down 24%. We still think we need to give their GnRH antagonist candidate drug for fighting endometriosis, elagolix, more time. Vertex (VRTX) went to the other extreme of issuing good news—fresh positive results for their telaprevir anti-hepatitis C drug candidate—but ultimately, it did not save them from a drubbing late in the month over fears the Obama administration will limit the prices of new drugs. These concerns may be justified in the fullness of time, but are unlikely to be an issue for telaprevir in any case, as curing many otherwise uncurable patients of hepatitis C is extremely cost-effective (in that the cost of treating advanced cases of hepatitis C far exceeds the cost of telaprevir).

Finally, our oil short ETF, DUG, continues to disappoint, down 18% on the month despite a decline in the price of oil.

The risk of a serious downturn continues to be significant here, and consequently we remain net short. However, it does appear that the new administration is angling to establish continuity with the old one with respect to the policy of material intervention in the market to prop up insolvent “too-big-to-fail” enterprises. While we feel these policies are long-term disastrous, there is some “upside risk” should the collective wisdom of the market come to think otherwise. Generally, new political leaders get some benefit of the doubt. So far the the market has not rallied in reaction to the election results (except for the five days leading into the election), but it could still happen.

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Oct 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 12 Nov 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 26.21 1,493.97 -21.15% 12.83% -17.55% -11.79%
NBIX 22-May-07 158 11.33 1,798.14 4.13 652.54 -11.94% -9.03% -63.71% -50.40%
GSS 19-Jul-07 451 4.19 1,897.69 0.88 396.88 -42.11% -72.15% -79.09% -70.36%
GSS 24-Aug-07 613 3.08 1,896.04 0.88 539.44 -42.11% -72.15% -71.55% -65.28%
BZH 24-Mar-08 -214 10.99 -2,343.86 2.28 -487.92 -61.87% 69.31% 79.18% 162.20%
BAC 8-Sep-08 -69 34.73 -2,388.37 24.17 -1,667.73 -30.94% -41.42% 30.17% 515.49%
GS 8-Sep-08 -14 169.73 -2,368.22 92.50 -1,299.90 -27.73% -56.99% 45.11% 1201.23%
HBC 8-Sep-08 -30 79.11 -2,365.30 59.00 -1,770.00 -27.01% -29.52% 25.17% 369.76%
DUG 10-Sep-08 56 42.83 2,406.48 37.05 2,186.91 -4.63% 2.97% -9.12% -49.60%
BBY 19-Sep-08 -58 41.49 -2,398.42 26.88 -1,567.16 -28.32% -48.95% 34.66% 1230.08%
MA 19-Sep-08 -11 225.18 -2,468.98 147.82 -1,627.67 -16.64% -31.31% 34.08% 1180.79%
WMT 19-Sep-08 -40 59.70 -2,380.00 55.81 -2,232.40 -6.81% 17.42% 6.20% 68.75%
CAB 19-Sep-08 170 14.08 2,401.60 7.95 1,351.50 -34.19% -47.25% -43.73% -99.33%
WFC 09-Oct-08 -73 33.06 -2,405.38 34.05 -2,485.65 n/a 14.45% -3.34% -43.08%
cash 16,906.53 31,343.96
ISOP 03-Jan-07 10,000.00 24,826.77 7.70% 13.65% 148.27% 64.54%
Global HF 03-Jan-07 10,000.00 9,429.20 -6.01% -15.15% -5.71% -3.17%
NASDAQ 03-Jan-07 2,415.29 1,720.95 -17.73% -35.11% -28.75% -16.94%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.

Transactions: The ISOP was a bedrock of stability this month; with the market going totally insane in terms of volatility, we felt constrained to make only one transaction…and that was essentially a move to bring the port more into congruence with the way it used to be, in that we replaced our Wachovia (WB) short position (covered last month) with a short position in the stock of the company that acquired WB, viz. Wells Fargo (WFC). A big contrast from last month, when we had a portfolio-record 14 transactions in moving to a net short stance. Speaking of our shorts, we did cheerfully pay out several dividends for our financial services and retailing stocks (when you are short a stock that pays a dividend, you have to pony it up).

  • 3 Oct—paid out BBY dividend of $0.14/shr
  • 8 Oct—paid out MA dividend of $0.15/shr
  • 9 Oct—Sold short 73 WFC for $33.06/shr
  • 23 Oct—paid out GS dividend of $0.35/shr

News:

Comments: LOL you might think that the amount of effort that goes into managing portfolios in a month with one transaction would be a lot less than the effort expended in a 14-transaction month…but when the market is going insane and repricing everything from day-to-day, just about the same degree of close attention is required, regardless of whether or not anything is being bought or sold. On average, the NASDAQ goes up about 10% a year…well there were two DAYS in October where the NASDAQ index was up 10%+…and this in a month were overall, the index was down 18%, the two gigantic up days notwithstanding.

The level of volatility this month was positively staggering. Normally, the index changes (up or down) an average of about 0.5% each day. The average daily change in October: ±3.7%…more than seven times normal!

Obviously, when the level of systemic risk is high, the potential variation in the value of any given company is extremely high, depending. For example, if the economy recovers, then Best Buy (BBY)—which we are short—is worth, say, $15+ billion. But if we fall into a depression where no one can afford to buy big flat screen TVs, then maybe they go out of business. Pretty big range in valuation! Add to that the complexities of the economy, and the impossibility of instantly and accurately calculating the impact of the latest government actions, the inevitable result is a wildly gyrating consensus.

Be that as it may, when the dust settled, we were +8%, the hedgies were -6%, and the NASDAQ was, as we said, -18%. A great month for the good guys! Overall after 22 months of operations, the ISOP is now +148% compared with -6% for the hedgies and -29% for the NASDAQ.

It was a bull market for news this month. On 3 October, W signed the bank bailout bill (after rejecting it last month, the House took another vote after some fig leaves were applied and enough Republicans changed their votes to “yes” to pass it). Also on 3 October, Wells Fargo (WFC) outbid Citigroup (C) for our former short, Wachovia (WB). On 6 October with the market tanking, the Fed announced an emergency $900 billion in short-term loans to banks (this is in addition to TARP funds). On 7 October with the market tanking still more, the Fed announced an emergency move to lend $1.3 trillion to non-financial services companies. On 8 October with the market still on the express elevator headed for the sub-basement, the Fed cut interest rates in a move coordinated with other prominent central banks including those of China, the ECB, the UK, and Switzerland. Overall, the S&P 500 dropped 18.2% for the week ending 10 October, its worst week ever. On 14 October, the US Treasury announced distribution of $250 billion of the TARP funds in the form of loans to several large banks, including our shorts Bank of America (BAC), Goldman Sachs (GS), and Wells Fargo (WFC) as well as C and others. On 21 October, the Fed announced another emergency short-term loan program, this time to money market mutual funds, which had stopped lending to banks in the wake of a huge wave of redemptions.

The fix is clearly in, with Democrats in Congress and working hand-in-glove with the Republican Secretary of the Treasury and Republican appointee Fed Chairman Ben Bernanke to “stablize” the current broken-down system. It appears that none of the broken financial services companies—not even AIG, Freddie Mac (FRE), or Fannie Mae (FNM), who are in the worst shape—will be allowed to fail so long as the Fed’s printing presses are still able to pump out funds to loan them to “tide them over.” W has practically turned invisible during the crisis but evidently has no objections (if any opinions whatsoever). Senator Barack Obama, the Democratic party nominee for President, has pretty carefully avoided saying much of anything, but on 1 October he voted for the bailout (as did his running mate, Senator Joe Biden). The GOP standard bearer, Senator John McCain, has been somewhat more vocal and way more incoherent; in the event, he, too, voted for the bailout on 1 October. We believe this approach is both morally wrong—bailing out wealthy bankers with taxpayer money—and shortsighted, in that it will only delay the day of reckoning and ensure both that the eventual nadir will be lower and the recovery therefrom harder and longer.

Speaking of hard, that it was for our portfolio, as ever single equity was down in October. (WFC, which we are short, was up between the day we bought it—9 October at the open—and the end of the month but we obviously sold it short too late because it was down overall for the month.) Fortunately, we are now short eight positions and long only six so on balance, a down market is a good thing for our portfolio. Among the long positions, our two biotech companies (VRTX down 21% and NBIX down 12%), our gold miner (GSS down 42%), and our relatively new retailer (CAB down 34%) were no help whatsover.

We also own DUG, which is an ETF that is supposed to move twice the inverse of the price of oil…well crude was down sharply in October, but on extremely volatile trading, and DUG somehow managed to lose 5%, declining more on the days that the price of oil increased sharply that it gained on the days oil declined. We need to keep this one on a short leash as it is evidently poorly designed and not behaving as we expected it to.

Aside from the aforementioned WFC, we were very happy with the performance of our shorts. Our real estate short (BZH) was down 62%! The other financials shorts were all down sharply (BAC -31%, GS -28%, and HBC -27%). All three retail-related shorts were down big (BBY -28%, MA -17% and WMT -7%).

Clearly, the risk of a serious downturn continues to be significant here, and consequently we remain net short.

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Cabela’s (CAB) update #2—3Q08 results: record sales, but weaker outlook

Posted by intelledgement on Sun, 02 Nov 08

Another quarter, another sales record.

Cabela’s (CAB), our outdoors provision retailer and direct marketer, announced 3Q08 results Thursday and for the 18th time out of 18 quarters since the company went public in 2004, their revenues set an all-time record for that quarter. Sales in the quarter amounted to $612 million, 12% ahead of last year’s then-all-time-record-3Q sales of $547 million. Of course, the company has more outlets now than a year ago, most notably their first “next generation” 80,000 square foot store which opened in Rapid City this quarter. Same store sales were actually down 9% and profits declined 27% to $10 million from $13 million a year ago.

“The challenging macro-environment, general consumer concerns about the economy and the unprecedented events in the financial markets impacted sales trends in our business during the quarter,” stated CEO Dennis Highby. “We continue to monitor our business carefully and remain focused on managing factors within our control, including executing on our profit-improvement initiatives, implementing additional cost reductions and aggressively managing inventory levels. To that end, we have experienced significant improvements in inventory levels and cash generated from operations. Additionally, despite the difficult environment we continue to gain market share, grow our direct customer file and add Cabela’s CLUB Visa cardholders. The significant progress we have made in these areas positions us extremely well for future market share growth.”

The company cut their guidance on overall revenue growth for 2008 from around 15% to less-than-10% and slashed profit projections from a 5% increase over 2007 to a 10%-to-15% decline. The market reacted well to the report, with the stock up 7.6% on Thursday and, after opening sharply lower, finished the day Friday up another 2.4%. Of course this may have had more to do with the overall market rallying both days, after falling as much as 32% between 19 September—the day we bought CAB—and Tuesday.

In any event, we are licking our wounds here—now down 34% since buying the stock six weeks ago—but with sales holding up as well or better than expected and the basic business model extremely sound, we are here for the long haul.

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Cabela’s (CAB) update

Posted by intelledgement on Sun, 12 Oct 08

Our retail and direct marketing provider of outdoors merchandise, Cabela’s (CAB) signaled that they are feeling the pinch this week with the announcement of a 10% reduction in their headquarters staff on Tuesday. “This workforce reduction is an effort to reduce costs and improve efficiencies,” stated Dennis Highby, Cabela’s CEO. “While this was a difficult and challenging decision, I believe it was necessary given the macroeconomic environment we are facing.”

The market reacted negatively to the announcement as the stock closed down 3% on Tuesday. By the same token, it has been down 13 out of 15 trading days since we bought it on 19 September, and overall is now—as of Friday’s close—down 35% in three weeks. This from a profitable company that has done nothing but set new Y-O-Y quarterly sales records for the past 17 consecutive quarters! The Street is evidently failing to appreciate our theory that if The World As We Know It ends here due to the meltdown of all the big banks and collapse of all currencies, a company that sells guns and fishing poles is going to be sitting pretty. Well, any portfolio that includes investments in the stocks of individual companies is undertaking a higher level of speculative risk and this is a good example.

Fortunately, stock prices of the three retail-oriented companies which we sold short (BBY-MA-WMT) have also declined sharply—albeit not quite so sharply—and overall, we are ahead on our retailing stock speculations.

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Sep 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Sun, 12 Oct 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 33.24 1,894.68 23.75% 43.09% 4.56% 3.11%
NBIX 22-May-07 158 11.33 1,798.14 4.69 741.02 -9.28% 3.30% -58.79% -47.87%
GSS 19-Jul-07 451 4.19 1,897.69 1.52 685.52 -0.65% -51.90% -63.88% -57.14%
GSS 24-Aug-07 613 3.08 1,896.04 1.52 1,606.06 -0.65% -51.90% -50.86% -47.48%
BZH 24-Mar-08 -214 10.99 -2,343.86 5.98 -1,279.72 14.08% 19.52% 45.40% 105.36%
BAC 8-Sep-08 -69 34.73 -2,388.37 35.00 -2,415.00 n/a -15.17% -1.11% -16.99%
GS 8-Sep-08 -14 169.73 -2,368.22 128.00 -1,792.00 n/a -40.48 24.33% 3617.53%
HBC 8-Sep-08 -30 79.11 -2,365.30 80.83 -2,424.90 n/a -3.44% -2.52% -34.54%
DUG 10-Sep-08 56 42.83 2,406.48 38.85 2,287.71 n/a 7.98% -4.94% -60.32%
BBY 19-Sep-08 -58 41.49 -2,398.42 37.50 -2,175.00 n/a -28.77% 9.32% 1824.79%
MA 19-Sep-08 -11 225.18 -2,468.98 177.33 -1,950.63 n/a -17.60% 20.99% 55900.91%
WMT 19-Sep-08 -40 59.70 -2,380.00 59.89 -2,395.60 n/a 26.00% -0.66% -19.62%
CAB 19-Sep-08 170 14.08 2,401.60 12.08 2,053.60 n/a -19.84% -14.49% -99.45%
cash 14,501.15 28,890.43
ISOP 03-Jan-07 10,000.00 23,051.87 -6.22% 5.52% 130.52% 61.55%
Global HF 03-Jan-07 10,000.00 10,032.13 -5.76% -9.72% 0.32% 0.18%
NASDAQ 03-Jan-07 2,415.29 2,367.52 -11.64% -21.13% -13.39% -7.92%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 2% rate of interest on the listed cash balance.

Transactions: Well, following three months of almost no activity transaction-wise, the market has been crazy, with valuations all over the place—but trending down, big time—and consequently we felt constrained to make major adjustments to the portfolio, mostly moving to the short side. First we shorted a bunch of financial company stocks. Then we sold all our oilers and our one mining stock and bought an ETF that goes up when the price of oil declines. Then we shorted a cohort of retail-related stocks, and—partly as a hedge—bought a fourth retailer. Finally, we covered the WB short. Not surprizingly, the month set a new portfolio record for the most transactions ever: fourteen (the previous record was five)!

News:

Comments: Sheesh…this month required an awful lot of work to produce a 6% loss! The silver lining was that the hedgies also lost 6% and the NASDAQ was down 12%, so it could have been worse. Overall after 21 months of operations, the ISOP is now +131% compared with ±0% for the hedgies and -13% for the NASDAQ.

So we did have a lot of company-specific news this month, but it was pretty much overshadowed by the macro-level proverbial excrement hitting the fan. We had the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE) on 7 Sep. A week later we had the bankruptcy of Lehman Brothers (LEH) and the acquisition of Merrill Lynch (MER) by BAC. Then we had a run on the money market funds ($140 billion withdrawn in one week), and the emergency $85 billion loan by the Fed to AIG to avoid a bankruptcy there. To close out the month, you have the spectacle of Republican Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke begging the GOP-controlled House for a $700 billion emergency bailout fund to be used to purchase so-called “toxic” assets that have plummeted in value and threaten multiple financial institutions who own them with insolvency…and being turned down! (Oh, and we almost forgot, the arrangement for Citibank (C) to buy our own troubled asset, WB.)

Clearly chickens are coming home to roost here. As we keep saying, this economy has serious fundamental flaws—too much debt and entitlement obligations, too much energy devoted to unproductive-to-fraudulent financial transactions, an unsound currency, underfunding of infrastructure investment—and the cultural focus on taking the path of least resistance and maximizing the immediate return on investment is impeding us from addressing these long-term flaws. While it would be painful, a collapse of the current Ponzi-based financial system would clear the decks for the creation of a healthier, sounder approach, and the resultant crisis would be resolved a lot faster than is likely to be the case if we just kick the can down the road again here. So we were cheering when the House voted down the Troubled Assets Relief Program, even though the markets tanked on the news. (Of course, by then we were mostly short. LOL)

Speaking of which, the market was extremely volatile this month—it was ±3% on two days, ±4% on three days, ±5% on three days, and -9% on 29 Sep (the day the House voted down the $700 billion bailout bill). Ofttimes the market does not move as much as 9% in an entire year! In that light, it is not a shocker that we felt constrained to make a few moves…such as closing more than half the positions we started the month with and then opening up even more new ones. Among the few holdovers were our two biotech companies (VRTX up 24% and NBIX down 9%), our gold miner (GSS down 1%), and our housing industry short (BZH -14% by virtue of which we gained). As for the newcomers, two of our three financials short were up (BAC +1% and HBC +3%) but GS was down 24% in only three weeks. Two of our three retail-related shorts were down big (BBY -9% and MA -21%) in only two weeks while the other gained a point (WMT +1%). Our oil short ETF (DUG) was down 5% and the retailer we went long on (CAB) manifestly should have been a short as it was down 14%. You can help both yourself and the ISOP by going to their website and stocking up on ammo and fishhooks as insurance against a potential collapse of the system.

Clearly, the risk of a serious downturn is now greater than a month ago, and we are about as short as we are going to get. Fasten your seat belts; it’s going to be a bumpy night.

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BUY Cabela’s (CAB)—“World’s Foremost Outfitter”

Posted by intelledgement on Fri, 19 Sep 08

OK, OK…yes, yes we just shorted a bunch of retailers earlier today. Banks are on thin ice, credit has dried up, real estate is crashing, gold is soaring, the chairman of the Fed and treasury secretary are begging Congress for $700 billion of taxpayer money to bail out the insolvent financial sector, the economy is tanking, consumer spending is drying up…so why are we buying a retailer here?!?

Well, for one thing, Cabela’s—the “world’s foremost outfitter”—is not just any retailer. They are focused on a segment that we expect to remain strong even as the US economy overall suffers: hunting, fishing, camping, and related outdoor merchandise. Secondly, while they have been expanding their network of stores (28 in the USA and one in Canada) rapidly—they increased their square footage 49% in 2007 and opened two more stores this year—their roots are in direct marketing, and it still accounts for about half the company’s revenue. The founders, Dick and Mary Cabela, ran the initial direct mail operation from their kitchen from 1961 to 1964, moving to the basement of Dick’s father’s furniture store in their hometown of Chappell, Nebraska when they needed warehouse space. By 1969, they had expanded to a combined 50,000-ft. warehouse/store in nearby Sidney. Over the decades, revenues from retail operations grew from 0% to 50%, but they still publish nearly 100 catalogs a year…and their direct marketing roots enabled them to make a seamless transition to the internet starting back in 1998. Check out their first-class website.

Not to say that Cabela’s have been unaffected by the current economic travails. They have slowed their expansion plans—originally they intended to open four stores this year—and have had to scramble a bit to keep their financing in order. Their debt has ballooned from $200 million when they went public four years ago to $800 million as of 2Q08, and their profit margins have thinned. Never-the-less, they have increased their year-over-year revenues and turned a profit every single quarter—17 in a row and counting—since the IPO in June 2004. But a receding tide lowers all boats and the stock—which was valued at $20 at the IPO—is down some 40% from where it was a year ago ($25.03 on 19 Sep 07).

Arguably, even if cheap compared to past levels, this is not an optimal time to buy CAB with the economy clearly under pressure here. There is panic in the air and the stock could easily plummet (along with everything else) to bargain-basement levels. But we have two compelling reasons to buy CAB, one tactical and one strategic. The tactical reason is that we are selling short three retailing-related companies today and buying CAB—whom we believe to be in a stronger position than any of the others—serves as a hedge to limit the damage just in case we are wrong. The strategic reason is the one we already mentioned: if things do get rough, we expect that a company selling guns and fishing rods and stuff you can use to “camp out” if needed will do exceedingly well. While not directly targeting the survivalist market, Cabela’s offers a lot of the basic necessities at great prices.

What will most probably happen is that the stock of all four retailing-related stocks will go down, and if we time it right, we will cover our shorts near the bottom (and maybe buy some more CAB!) and then (subsequently) profit on this speculation, too.

Or worst case if things get really bad, hopefully being a Cabella’s shareholder will count for something if and when ammunition gets scarce and we go to one of their stores to restock our cache.  🙂

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