Yesterday I took some gains off the table and, though I still believe there may be some upside left here, the risk/reward is not as attractive as it was two months ago, justifying a smaller position sizing in my portfolio (from 10% to 4%).
On a side note, it is clear that MCZ trading has been taken over by the momentum crowd, which is fickle and generally unpredictable. This crowd could easily take the stock much higher from here, but I do not want to bet on that, as that area is outside my expertise and investing style. I continue to hold a position based on the valuation prospects, not the short term price movement.
Onto valuation: the Halo licensing deal was a big win, and has the potential to add $.04+ of earnings next year alone. At $1.43 per share, the stock is trading for about 20x my estimates of FY07 earnings of $.07 a share.
As for FY08, I have outlined four updated scenarios below, updated largely based on my expected impact from the Halo deal:
The aggressive scenario would include events like the inair product being a solid hit, or MCZ getting a GTA license, while the worst case scenario would have the opposite occur (as well a other unexpected issues). You could make an argument that the stock should be valued at more like 20 earnings, in which case the weighted upside would be about 85%. That said, I think MCZ is set up for a stellar FY08, but that the comps will be difficult to match in 2009 and thus deserves a lower valuation.
I am excited about the company's prospects for FY08, and will be looking to add to the position if the stock dips back down to around $1.10, which I think may be a possibility in Q1 or Q2, given what appears to be a somewhat weak pipeline for MCZ in those quarters. I will likely post another update when Q4 is announced, though I believe the big catalyst here over the next few months will be the Halo release, and any announcement of GTA or other big license deals.
MCZ 1-yr chart: