Individual Investor Response for THQ
We rarely come out and respond to reader and shareholder concerns regarding a stock outside of our magazine or updates, but it seems the uproar over THQ has gotten a little out of hand. We want to clarify and make very clear some issues regarding THQ.
First, Individual Investor Magazine is a separate entity from WisdomTree Associates. In other words, just because WisdomTree owns a stock does not mean that II is going to tout it.
Second, WisdomTree is not shorting THQ, nor has it ever. There seems to be an attitude of frustration on the part of THQ shareholders due to the lackluster performance of THQ's stock. All one has to do is simply look at is how the stock reacted to each announcement about the secondary offering. When it was announced on 12/23/96 the stock fell from $9.88 to $8.50 in one day. Then the pricing for the offering was announced on 2/11/97 and the stock fell from $8.56 to $7.38. Then the offering was completed and the stock rallied for one day, and on 2/18/97, two trading days after the offering was complete, THQI hit its recent high of $8.50. Since then, the stock has plummeted to $5.88 on 3/25/97. The point we are trying to make, which many seem oblivious to, is the enormous pressure this offering has put on the stock price. And it appears recently the only sellers have been those from the offering even to the point of punitive selling(selling at a loss).
Third, we totally understood the impact of the offering and we immediately became cautious in our outlook, and rightly so as the stock fell precipitously from a peak of over $10 a share to a low of $6 a share. We recommended THQ in November 1996. In December 1996, we pointed out a cash flow risk. Low and behold THQ announces a secondary offering that surprised analysts and crushed the stock.
Fourth, we were wrong on calling the game WWF, and by saying THQ was embarking on a new strategy, and we have corrected our mistakes. We were not wrong in calling this a risky stock. Its future in 32-bit gaming depends on two or three games this year. Also for a company the size of THQ to overcome the odds and beat out its larger competitors was a question mark. The second we had found that it had, we started pounding the table because that was what we were waiting for. And THQ has dispelled those risks and overcome those obstacles.
Fifth, the company uses a more aggressive accounting practice than its competitors. THQ capitalizes software costs, meaning they turn their expenses into an asset and then amortize it over a long period of time. If these costs were expensed like they should be, THQ's earnings would be substantially lower. Portfolio managers, analysts, and other investors out there are obviously penalizing THQ as it possesses a much lower multiple on an EPS basis, but on a cash earnings basis they are probably very similar to its competitors. To trivialize this practice, is simply ignoring fundamental analysis.
Sixth, if you write to us, we read it, but just because you write us does not mean we are going to respond, or that you deserve a response. We try to answer as many letters through updates, clarifications or directly, but with a circulation of nearly 500,000, it is simply impossible to answer everyone. Please keep the letters coming, we read them and some of them are very insightful.
Seventh, if you want to blame anything or anyone for the stock's decline it should be the offering and the horrible way in which it was conducted, for the offering just drove down the stock to the $6 to $7 range from which it has yet to recover.
Eighth, our beta web site was fundamentally flawed in the feeds of information we were getting. We couldn't do anything about the trailing earnings or other information on any of the stocks while it was up. We apologize. However, we were working on a much better site, and it is finally online. The address is www.iionline.com. Please come and check it out, you should find it much more accurate and timely. And tell us what you think.
In summary, we like THQ and we think it is a great company. At this price, with its newly improved balance sheet, and two titles in the Top 3 at retailers such as Electronics Boutique, much of the risk has been removed from the stock. It currently has a very compelling risk/reward profile. Our current price target is $13 to $14 a share. |
