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A stock I think currently has a lot of downside potential is Activision (NASDAQ:ATVI). I first wrote about this company in my June 21st article. Here’s the rundown on Activision:

1. ATVI has terrible margins and Returns on Equity.

2. The stock has been trending downward and underperforming the rest of the market.

3. Delays in “next generation” gaming consoles will keep pressure on revenues and profits.

4. The company has shown losses in 3 of the last 4 quarters.

5. Questionable accounting issues could keep a black cloud over this stock for quite some time – regardless of how the business performs.

6. At a P/E of 80, I think this stock could fall a lot more over the short term – especially if we see it break support at $10.

Although this stock hasn’t fallen like a rock (better yet, like a VeriSign), my ideas for why it could fall still stand.

The company has a weak business. Most software companies have profit margins and returns on equity in the double digit range. Activision’s are under 5%.

The company has even been losing money in 3 of the last 4 quarters, and the accounting issues that have been raised recently stand to decimate this stock if any of them can be substantiated.

Over the past few weeks, even more news has come out on this company and made me even more bearish on the stock.

For instance, on Wednesday July 19th the company announced that it was the subject of a shareholder lawsuit related to its option granting practices.

As I’m sure you know, the SEC and shareholders alike are on a witch hunt for companies engaging in “shady” options practices like backdating options or using “spring loaded” options grants.

[FYI: Backdating options is a practice companies use to literally “backdate” options contracts for executives, in order to take advantage of lower prices earlier in the year. This pretty much guarantees profits for whoever those options are issued to, while shortchanging shareholders.

Spring-loading is when a company issues options to employees right before a favorable announcement about the company is about to come out. This way the options will be profitable in a very short period of time.]

So unless Activision reports stellar earnings on August 3rd, I don’t see this stock having any significant upside potential in the near term – all I really see is a lot of downside here.

And any stock with more downside than upside is not one I’d like to have sitting in my portfolio ready to take away all my hard earned dollars … would you?

Source: Activision: More Downside Seen