General Thoughts:
1. Valuation -
There is a very unrealistic valuation model being placed on ALL stocks these days. We discuss THQI not being "fairly valued" because it does not carry the same valuation of ERTS which has a PE of 40.
I don't consider a PE of 40 very realistic for ERTS to be frank. Do we really want to pay a 40x premium for a company that makes games? Given our phenomenal economy the past 10-15 years, we have lost sight of reality, in my opinion. I honesty feel that THQI is closer priced to "fair value" than ERTS.
Historically, PE has hovered around 12-15 for the general market, compared to around 20 currently. Remember, PE is a measure of the premium people are willing to pay for a stock. There really is no justification for this in my mind other than "investors" have lost sight of what makes a good "investment" vs. a good "play".
When people begin investing individually vs. through brokerages, there can only become less consistent results to follow. The brokerages have typically had some sort of reason to their madness, while individual ivestors are more prone to act emotionally. I think all you have to do is look at the volatility of the general market over a 15-year period, as more individuals have begun investing on their own, and you can see what I mean.
This bodes well for companies like THQI, which is already fairly valued, and I think "undervalued". As the market reaches a point where everything is "expensive", the tendency to come back to stocks that are "fairly valued" becomes more in favor. We've been watching the internet companies take the high road, and been told THQI is "falling behind".
I think not! THQI is moving along quite nicely, and these other companies are moving farther and farther into la-la land. A PE of 300 is reality? I think NOT! What kind of "investor" is willing to pay a 300x premium for ANY company? None, no investor would pay that kind of a premium, barring a very unusual circumstance, but "players" will gamble on this given poor long-term historical insight into the market.
Ain't gonna happen, and for the "investors" that simply hang-on, they will be "rewarded", actually they will "earn" what is deserved, while the players will be "punished" for making poor decisions. Don't lose sight of the fact that THQI at a PE of 12-20 is "fairly to undervalued", and has limited downside potential but much greater upside potential. A play at a PE of 300 has limited upside potential, but a HUGE downside potential, good luck to those that take that route.
2. Business model -
THQI has BECOME the company they are because they have obtained licenses that provided a great return. They did not become the company they are by hunkering down, but rather agressively pursuing new deals.
Isn't is sensible that the company pursue this same strategy in the future? Does there really need to be a reactionary move to counter the current short-term stock price movement? I say no, but that's my opinion that it would represent an action that reduces the capital available to pursue what has worked in the past.
We can see that the path is difficult no matter the route chosen. Buy a "premium" license like WCW, and get punished if you lose that license. Buy lesser known licenses like BASS or bowling, and get ridiculed for obtaining "second rate" licenses. Pretty damn unfair, but that's just the way it's going to be I feel.
Given that, I celebrate Mr. Farrrell's attitude, which seems to represent an "I don't understand the investing communities rational, but I don't give a shit" response. GOOD for him, and GOOD for the company that he has the courage as well as wisdom to pursue this path. I know he has the business sense to make things work, so I will support him in this 100%.
I am a business owner, and I have done well by doing the exact same thing. People have asked "are you sure you should be doing that?", or "what makes you think you're going to get away with that?". It is part arrogance, and part confidence that allows me to reply "because I will make it work, and I know this business better than most do".
Let this management make the decisions it feels will lead to future success, most good ones, possibly a few bad, and we will be rewarded as share holders. If we second guess this management, it loses as much confidence in it's shareholders as the other way around. We REALLY don't need that, becaues I feel the ONLY people Mr. Farrell feels beholden to is the shareholders.
In business, you just know people that attempt to live to higher standards, they are emotional, focused, determined, and they are usually fiercely loyal. As much as Mr. Farrell may be upset in the stock price for the company's benefit, he is probably upset for the share holders as well. Someone should ask him, I bet this would prove to be the case.
3. Development -
What I would like to see is some more forward planning if that is possible. If THQI has the knowledge that a license will be expiring like WCW, I'd like to see it more prepared for the possibility it will lose the license or have to pay more for the license.
In hindsight, would it have been wiser to use some of this excess capital now available to re-secure the WCW license? I don't know, but this is the kind of question I think can be asked well in advanve to prepare for this type of circumstance.
THQI has addresses this issue with it's WWF license, by making the term of the agreement a full 10 years!!! YES, that's one way of handling the situation, and a very effective way to avoid the situation in the first place.
But also, in anticipation of losing a license, maybe there should also be pre-development work that takes place to smooth any potential transition. If there was some advance feeling that THQI might lose WCW, it might have made sense to begin preliminary development on a WWF title, in anticipation of a future move to replace the loss.
This sort of contingency plan might have allowed THQI to release a WWF title near the time period when they must stop selling WCW games. It is difficult to accomplish, and it takes some resources away from developing known products, but it might be a thought worth considering as the company get bigger.
4. Licenses -
Go for the biggies, and make them long-term. That's really my only two thoughts, because the process sure seems to be brutal no matter the path taken. That's why I think the WWF deal was a complete and total winner deal.
The other consideration is one made by Marc and Todd, we NEED a presence in the PC arena if we want to grow at intense levels going forward. There is growth in obtaining more console game licenses, but there are whole new markets abvailable by securing PC licenses. Todd, great thought in obtaining Id to secure a first-rate title, AS WELL AS obtain ongoing royalty and license fees. Marc, I think you made the exact same case as well. I agree 100%!
5. Reaction -
I'm frustrated by people's reactions to unexpected turns in the stock price. This stuff just happens, and there is nothing we can do to stop it. Given that, it does not make sense to change or shift one's investment strategy simply because this happens.
Just because drunk investors slam into our well running investment vehicle, that should not become the motivation for the company to assume such a course. It's a shame that this sort of event has to occur, but it does, and I think there is not really much we can do about it.
There is a case that can be made the "global capitalism" is placing capital at the forefront, even in front of "true value or worth". An excellent book that discusses the ascent of capital as king, above even government or the rights of people can be found in a book by Soros, called "The Crisis of Global Capitalism".
As capital becomes more free to roam, there is going to me more volatility that comes with it. That makes it more important to invest in "safe" companie that are "fairly" valued, so that as capital moves out, it is less affected as a result.
I'm staying in THQI, this is one of the best run small caps I have seen, I am no seasoned investor, but I am also a small business owner that recognizes a well thought business plan, and execution that as much as possible attempts to realize that plan. Carry on THQI, full speed ahead !!!
Rugrat Regards, JB |
