It's D-Day For Take-Two Interactive

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Includes: EA, TTWO
by: Stephen Frankola

Yesterday's session featured some strange exchanging of Take-Two Interactive Software Inc. (NASDAQ:TTWO) shares, just one day before the company is set to release earnings.

There was no news released, though Barron's later said that the price decline was due to rumors about Electronic Arts Inc. (ERTS) walking away from merger talks.  ERTS had an executive speak at a conference right around noon.

Below is a graph of TTWO's trades between about 11:15 and 12:05, when shares declined sharply, rebounded sharply, and then settled roughly 5% lower than where they opened.

click to enlarge

Click to enlarge

As the stock crossed $24 about eight minutes into the graph, the first pickup in volume can be seen, possibly by stop-limit orders being triggered. The price continued to slide on light volume until shares broke through $23, when volume accelerated to over 50,000 shares per minute.

As the shares dropped below $22, volume topped 150,000 shares per minute, which is impressive, considering only 500,000 shares traded during all of Friday and only 1.3 million exchanged hands yesterday.

Frantic selling and buying took place over the following ten minutes, as about 1.3 million shares were traded. It seems as though stop-limit orders first were triggered, panic selling ensued, and finally, as the stock sat at $22, buyers came in to snap up shares.

Normally I wouldn't analyze the intraday trading of a stock so deeply, but the trading pattern certainly seemed odd. TTWO consolidated at $25 during the previous week, with Thursday's trading featuring a $0.15 range.

If there were a news leak, or some sort of manipulation, I'd expect to see it in the options, as premiums are still low enough that a trader with information could make a killing. However, volume and pricing on the options seemed normal. The options with the greatest volume were the $25 and $27.50 September calls; premiums did decline, but the $25 call, which went from being nearly at-the-money to almost 10% out of it, only lost about 25% of its value, and ended the day with a trade at $1.10. Volume was a little high (relative to open interest) in some deep OTM Sept, Oct, and Dec puts (with trades at the $15 strike), but I can't see the shares falling that low.

Therefore, I backed up the truck a little further and bought a few more $27.50 calls at a cheaper price, adding to my unwisely-large position going into today. (Thankfully, my recent good trades with First Solar Inc. (NASDAQ:FSLR) puts, American International Group Inc. (NYSE:AIG), American Eagle Outfitters Inc. (NYSE:AEO), and Ultra Dow30 Proshares (NYSEARCA:DDM) calls have helped to offset any potential losses from TTWO.)

Once again, in my humble, bullish opinion, all signs (besides yesterday's trading) point to good events today. I don't know why TTWO would have bothered setting up these secret meetings with ERTS if it wasn't showing ERTS something good, and I don't know why ERTS wouldn't have walked away already if it was wholly unimpressed. TTWO has historically beaten earnings, and the company is still riding the success of GTA IV, with a decent slate of titles to be released for the holidays this year.

Who knows, maybe TTWO will report a loss, since these talks were about some fire sale price at $14/share, and some speculator (or someone with inside-information) will be chuckling as they rake in the bucks. However, TTWO's management has insisted on the strength of TTWO's business, and empirical evidence doesn't contradict its statements.

Considering that ERTS lost over $400 million last year while TTWO is expected to book about $140 million in profit this year, barring a disaster, I don't get how TTWO shares would move lower. An independent TTWO (without this takeover hangover) would be trading much higher than it did yesterday, and TTWO should demand a price somewhere in the $30's if it is to be bought.

Prior to today's after-the-bell announcement, I'd expect that TTWO would trade around $22.50 or $25, as those option strikes have been heavily traded. When it reports at the close, a beat-and-raise (without any mention of a takeover) should send shares skyward; ultimately, there could be some announcement concerning the deal during the call tomorrow. Though there is the non-disclosure agreement, I can't believe that TTWO will be completely silent about a deal during the call today.

If I had a reputation, I'd be putting it on the line. Thankfully, if I'm wrong, no one really reads this anyway, and I'm young enough to lose some money. If I'm right, the profits, and vindication, shall be lovely.

Disclosure: Long TTWO Sept. $27.5 and $30 calls.