The investment strategy of Bowling Portfolio Management has been to select those stocks that are trading below their intrinsic value. Though the fund's portfolio is well diversified, its major holdings mainly comprise of the stocks from technology (20.1%), services (16.9%) and financial sectors (13.8%). As per the recent 13F filings, Bowling increased its holdings in 11 new stocks, and this investment was funded by reduction in its holdings in 10 old stocks including Activision Blizzard (ATVI), CA Technologies (CA) and Dell (DELL).
There is no doubt; seeing the arbitration around Dell, that this stock is no more a fundamental pick. I would definitely not suggest an investor enter in this stock for now. However, the other two stocks, Activision as well as CA Technologies, are rock solid stocks to maintain in any investor's portfolio. I see a lot of potential in both of them and would not suggest cutting down your position in them like Bowling did.
% Change in the portfolio
Activision Blizzard Inc. (ATVI)
CA Technologies (CA)
Year 2012 was a tremendous year for Activision Blizzard, and the company recently came up with its solid quarter four earnings. Its adjusted net revenue boosted up to $2.6 billion, which was 8.3% higher from $2.4 billion a year ago. The main contributors in its notable sales growth were the Call of Duty (CoD) and Skylanders franchises. CoD: Black Ops 2 has generated revenue of about $1 billion during the first 15 days of its release whereas the Skylanders made revenue of $1 billion worldwide. Activision shall continue to focus on its most popular games in the coming years and take advantage of their rising popularity.
As per the NPD data, Activision's Call of Duty has stood as the top most selling game in the US for the last four years. With overall sales of $13.26 billion, Call of Duty: Black Ops 2 again emerged as the most favorite game of FY2012. The gaming industry has tremendously grown in the last couple of decades and I expect, it will continue to grow to 70.1 billion by 2015 depicting a 16% growth from 2009. On similar lines, the online and PC game industry will also grow to $ 20 billion by 2015. Considering this long-term growth prospect, and taking into account the popularity of the Call of Duty, Activision will continue to invest in its top four franchises namely; Call of Duty, World of Warcraft, StarCraft and Skylander in 2013-14. Call of Duty contributes around 40%-45% to the company's total revenue. In order to retain Call of Duty as the first priority of gamers, Activision may also introduce a new version of the game in FY2013.
I feel the investors can remain assured about their returns, as the stock has already picked up an upside with around 28% return in the last three months. And looking at its portfolio of games, I believe this trend will continue in 2013.
In Jan 2013, CA Technologies declared its third quarter results. The company's topline drivers; North American sales and international bookings both declined by 11% each. Also, the overall revenue declined by 4% in comparison to the last year. Despite the negative revenue growth during 2012, the stock of CA technologies still looks attractive to me with around 4% dividend yield. Also, the company will return around 80% cumulative free cash flow (around $2.5 billions) to its shareholders through FY2014. This means, CA may increase its annual dividend from $ 0.2 to $1 per equity share.
The company is expecting positive revenue growth after the change in the management. As the new CEO, Michael Gregoire is expected to focus more on innovation of new products, and most importantly, on reduction in the cost of sales. I believe there is room for further cost reduction, although total operating expenses dropped by about 2% to $825 million in the recent third quarter. Furthermore, CA's total addressable market is expected to grow to ~$75 billion in the coming years.
Looking at its solid balance sheet and good cash flow performance along with initiatives from the new CEO, I recommend buying this stock.
Dell's last quarter revenue was affected by the cut throat competition in the PC and notebook segments and was due to the low business growth in Europe. However, Dell's stock has performed pretty well in the last three months with returns of about 44% due to its LBO rumors. After struggling for more than a year, Dell has finally decided to go private.
Dell's decision to go private is a reflection of the cut throat competition in the PC industry. I believe going private will give Dell an extra edge to sustain in the market and put up a challenge to the ever-growing competition. History says, Dell has been continuously diversifying its business and has invested ~$13 billion in acquisitions since 2008. Contrary to this, the LBO will add material leverage to its balance sheet which will ultimately hamper its ability to diversify its revenue and buy additional assets.
I believe Activision's stock is all set to grow leveraging upon its big names in the gaming industry. The new versions of its flagship games will help the company to post much higher figures in its sales. On the other hand, CA's enhanced capital allocation program along with the expected cost reduction and innovative initiatives by its new CEO shall fetch long-term revenue growth for the company. I rate a buy for both these stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.