What I Hold in My Portfolio - Part 2

by: Jae Jun

Continuing on from my portfolio holdings part 1.

Update on Gravity Co (NASDAQ:GRVY)

Good thing I waited a couple of days before writing this second part because GRVY earnings was announced and it was not a pleasant surprise.

Here is what the CEO had to say about how RO2 was performing in Korea.

The performance of Ragnarok Online II in Korea is below our expectations. However, I believe that we have overcome most of the technical problems in the early stages and that we are ready to release the game in the overseas markets where the game is eagerly anticipated.

Revenue was down, royalties was down and expenses was way up with all the marketing they put out.

The bigger question now is whether this lack of interest is the same across the industry, or whether this is a temporary setback as the game needs time to accumulate users and revenues with its Free2Play model.

Am I disappointed? Of course. GRVY was (still is) my biggest position. With expectations for the RO2 very high, it’s not surprising that the stock has been punished.

But ignoring emotions, think about the following:

  • GRVY is not eroding its assets. The balance sheet shows less than a 1% decline in book value since 1 year ago
  • Tangible book value is $2.16/share
  • Book value is $3.49/share
  • NNWC is $1.35/share
  • NCAV is $1.53/share

You may look at these numbers and say “so what?” and I’ve been saying the same thing for several years now.

RO2 didn’t blow everyone out of the water, but at the moment, the company does not burn through cash like most net nets and they have other games other than RO2 to add to revenue.

For now, there is no point in selling. In hindsight, if it was back above $3, I would, but not at these ridiculous levels.

Aeropostale (NYSE:ARO) and Radioshack (NYSE:RSH)

All I can say is that retail is a very difficult business and I’ve been wrong on every occasion. In fact, next time I’ll try shorting a retail stock I actually want to buy and see how that turns out.

Joking aside, ARO has been a disappointment this year also. Following the second quarter report, more time will be required by the company to turn things around as the back-to-school season is showing slower sales than anticipated.

ARO is now trading at close to its lowest point in 10 years with a reduction in fundamental ratios too. ROE, ROA and CROIC have been going down. A warning sign to watch.

I bought a 1% position in Radioshack before earnings in July and so far it has turned out to be the wrong move. You will find nothing but negativity on Radioshack and honestly it’s hard to say anything else considering all that has happened. No need for me to go over everything here because you’ll be able to find it on just about any site.

Instead, if you have time, read what I wrote about Radioshack before and tell me whether I was crazy or not for picking up some shares.

About ARO

Aeropostale operates as a mall-based specialty retailer of casual apparel and accessories. It provides a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, outerwear, and accessories for 14 to 17 year-old young women and men.

About RSH

RadioShack Corporation (RadioShack) is engaged in the retail sale of consumer electronics goods and services through its RadioShack store chain. The Company has two segments: U.S. RadioShack company-operated stores and others.

Dolby Laboratories (NYSE:DLB)

I’m quite surprised that the market is still discounting DLB so much. You have a company that will likely exceed $400m in FCF which will be all time highs in FCF. It’s growing slowly but the company is very conservatively run.

The original fear with DLB and the price cut last year was that it wasn’t going to be included in Window 8, but then DLB was selected for Windows 8. No problem there.

Licensing and royalties remains a very high margin business with business metrics showing DLB doing very well.

  • PE of 12.4
  • Cash adjusted PE is 8.9
  • P/FCF (NYSE:TTM) is 10
  • ROE of 17%
  • ROIC of 16%
  • CROIC of 20%

The balance sheet is at its all time strongest with a current ratio of 7.7 and all time low debt to asset ratio of 11%.

If you had to value the stock without looking at the stock price or company name, you would get something in the $50 range. The problem is corporate governance.

Ray Dolby can run it like his piggy bank and controls everything. But even if you discount the stock price with horrible governance, I don’t see it’s value dropping below $40.

About DLB

Dolby Laboratories, Inc. develops and delivers products and technologies that are used in the entertainment industry. Its audio technologies are used throughout the global entertainment industry.

Sold Dacha Strategic Metals (OTCPK:DCHAF)

Disappointing result from DCHAF.PK. I sold out of the position upon hearing the news that DCHAF.PK was acquiring a junior gold miner.

The problem is that a member of the board, Stan Bharti, through his company, runs both DCHAF and the junior miner. This insider related transaction is beyond my comfort threshold level.

DCHAF.PK has been trying to sell its inventory of Rare Earth Metals, but it hasn’t been successful. Rather than continue to try and liquidate the metals and then return the value to shareholders via a dividend or liquidating the company, management has taken the path to make their pockets fatter instead.

It wasn’t that long ago that I called a DCHAF.PK a conviction pick but with this news, it was time to sell even at a loss.

Disclosure: Long all stocks mentioned excel DCHAF