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NYU's 'All-Star' Portfolio Scores Profits With Video-Game Stocks

Jonas Elmerraji

Neal Sangani, the All-Star portfolio manager, says, "We started taking a look at [video-game stocks] because 'hardlines' [merchandise such as electronics and housewares] looked pretty strong for the holiday season."

Brian Crecente, managing editor of the video-game news Web site Kotaku, supports Sangani's take on the video-game industry. According to Crecente, this year's holiday season has "one of the highest numbers of 'AAA' titles [the gaming equivalent of a blockbuster movie] to hit stores in quite some time."

Sangani expands on his rationale for investing in video-game companies: "It seemed like people were buying video games [this holiday season] instead of clothes, and we thought that was the one area that would hold up to weakness in consumer spending."

So how did Sangani and the IAG play the video-game boom?

Playing the Activision Deal

The big news in the video game industry this month was the announcement on Dec. 3 that Activision (ATVI - Cramer's Take - Stockpickr) and Vivendi Games plan to merge and create the largest pure-play video game publisher, Activision Blizzard.

On Nov. 26 (a week before the deal news broke), the IAG added Activision to its All-Star portfolio for $18.93 per share.

For the IAG, one of the most alluring aspects of buying Activision was its product line and its exposure to Nintendo's popular Wii video game console. When it comes to investing in video-game publishers, Sangani says, "We're looking for big title exposure, and for exposure to the Wii." And with Call of Duty 4 and Guitar Hero III, Activision has two of this year's bestselling video game titles.

One of the most exciting aspects of the Activision-Vivendi deal, which is valued at around $18.9 billion, is that investors will now be able to put money into Blizzard Entertainment, the Vivendi subsidiary that makes a killing with its wildly popular World of Warcraft franchise.

That said, on Dec. 3, Sangani was able to cash in on the price premium the Vivendi deal created and sell off IAG's stake in Activision for $24.97 per share (up 32%).

While the group felt it was a good time for profit-taking right now, it's waiting for a more attractive price to get back into the stock.

In a Perfect World

One of the IAG's earlier gaming plays was Perfect World (PWRD - Cramer's Take - Stockpickr). On Nov. 21, the group bought the Chinese online game developer for $19.71 per share. As with Activision, Sangani and the majority of the IAG decided to walk away with gains. So on Dec. 4, the IAG sold Perfect World for $25.99 per share (up 33%).

As with Activision, the group is still bullish on Perfect World. According to Sangani, Perfect World is "the smallest [video-game] company and the fastest growing with a small market cap ." Sangani says he's waiting for Perfect World's stock price to "come down a little bit before I put a position back in."

Take-Two, With Feeling

IAG's most recent video-gaming buy is Take-Two Interactive (TTWO - Cramer's Take - Stockpickr), the publisher best known for its Grand Theft Auto franchise. On Dec. 11, the group added to its All-Star portfolio for $17.44 per share.

Sangani sees Take-Two as a possible buyout candidate and believes that the anticipated release of Grand Theft Auto IV early next year will be a big hit for the company. That's not to say that the company isn't without its flaws (see "Take-Two Struggles to Stay in the Game").

Hedging With Electronic Arts

Despite, as Sangani puts it, the IAG's "confidence in the video-game software cycle, with a slight premium on its expected forward earnings multiple ," the group decided to short a small position in Electronic Arts (ERTS - Cramer's Take - Stockpickr) as an industry hedge on concerns that Electronic Arts' key titles may not live up to expectations (see "Activision Deal Finds EA's Weak Spot").

As evidence of this, Sangani cites the company's recent price reduction on games such as Madden NFL, NBA Live, Medal of Honor and others. Sangani adds, "Despite enthusiasm following the companies recent quarter , Deutsche Bank put a sell rating on the stock, noting the premium on shares."

From Publishing to the Point of Purchase

According to Sangani, one of the more exciting areas to invest right now is the video-game retailing group. "We [the IAG] believe there are strong places we can place our bets and expect to put on a lot of 'pair trades.'"

Sangani explains: "One [pair trade] that has been working out well for us, thus far, that we put on a number of times during the semester is long Best Buy (BBY - Cramer's Take - Stockpickr) and short Circuit City (CC - Cramer's Take - Stockpickr). I am very confident for next semester as there is a lot more long-term 'smart money' buying interest in financials and retail, the two areas hardest hit and where we can find solid picks."

In addition to their pair trade strategy, the IAG has put away some gains with retailer GameStop (GME - Cramer's Take - Stockpickr), which it bought on Nov. 27 for $53.14 per share, then sold on Nov. 28 for $55.77 per share. Still bullish on the stock, the IAG bought GameStop again on Dec. 2 for $57.45 per share.

What's the IAG's next play and why? Stay tuned.