Market and Meaning is my weekly update on market movements and their meaning for you as an investor. Market and Meaning is normally reserved for premium subscribers but is currently being offered for free to all our readers.
PORTFOLIO UPDATESI hope everyone had a wonderful Christmas! What a great time of year to spend celebrating and enjoying together as family and friends. Due to the holidays, INVESTOR IN THE FAMILY will only publish our Portfolio Update article.
This week, we have some new additions to the portfolio as well as an in-depth overview of Glu Mobile. Each week, we intend to offer more in-depth coverage of each stock in the portfolio.
This week's additions:
Gilead is an investment in a strong biotech company that recently took a big one-day hit in price that offered a great entry point. Westport is a company in the natural gas sector that has been hit really hard of late, also offering a great entry point. More info on each will come in future articles. As always, let us know of any specific questions you may have before then.
In previous portfolio updates, I have shared the following simple grid for selecting stocks:
- Who else is recommending the stock? Is there an analyst I respect who is long?
- Do I like the management? Are they clear, honest, and sober-minded?
- What is the "story?" What is the compelling future that draws me to the company?
- Are the financials sound in terms of debt and cash flow?
- If I had the money, would I want to buy this business?
This week I am going to dig into Glu Mobile (GLUU) to give my rationale and reasoning for owning this stock personally and for placing it in the INVESTOR IN THE FAMILY portfolio. I will examine the company according to the five criteria mentioned.
As a brief intro, GLUU is a mobile gaming company. This simply means that GLUU makes mobile gaming apps for smart phones and tablets. Some of their more popular games have been the Deer Hunter and Dino Hunter franchises and most notably, Kim Kardashian Hollywood.
1. I first learned about GLUU through my subscription to PTT Research, which has Mark Gomes as its key analyst. While the PTT franchise has had a few rough spots this year regarding other analysts on its team, Mark has proven to be a very reliable source, with a strong track record for great stock picks. Mark first released this pick back in the Fall of 2013 and he has stood firmly behind it the entire way as a core holding in his portfolio. According to PTT Methodology, a core holding is one that could make up as much as 10% of your portfolio. You will need to make your own decision as to whether you think a position that large is right for you. In most portfolios, a full position would be 4-5%, but exceptions can be made.
Overall, there are officially nine analysts covering GLUU and the mean price target is $6.49/share while the median price target is $6/share. The overall price target range is $4/share on the low side and $10/share on the high side. A price of $6/share would represent almost a 50% gain from current levels.
2. While I have had no direct contact with management personally, I know that Gomes has and he speaks very highly of them. From an observation standpoint, what I like most about GLUU management is that they seem to make a lot of smart and sober decisions. This comes out on two primary fronts.
The first, is their monetizing strategy. GLUU has a very effective strategy for monetizing all of their games. This means that they rarely produce losers. Unlike much of their major competition, GLUU can create lots of games that all make money, as opposed to always having to swing for a home run. While many mobile gaming companies are fully dependent on the home run, GLUU consistently gets on base with singles and doubles. This means they never need a home run, but if they do, it's more like hitting a walk-off grand slam.
The second thing that points to GLUU management making good decisions is their acquisition process. Management consistently makes smart acquisitions that bring more gaming franchises into their highly effective monetizing platform.
3. A major part of the "story" for GLUU is captured in their great management, monetizing ability, and acquisition process. In addition to that, the mobile gaming industry is growing very quickly. I have read reports that it is growing at 35%+ per year and expected to continue that trajectory at least into 2016. Personally, I like the idea of owning companies in high growth markets. When the high growth market of mobile gaming is combined with a well run company like GLUU, that makes for potentially great investment opportunity.
As mentioned, GLUU has several strong games and in some cases game franchises such as Deer Hunter, Kim Kardashian Hollywood, Dino Hunter, Racing Rivals, Eternity Warriors, Diner Dash, and Tap Sports Baseball.
4. Regarding financials, I will first look at GLUU debt. Total debts were 35.8 million in 2011 and had grown to 40.3 million in 2013. Final numbers for 2014 are not available, but as of the third quarter debts had grown to 69.5 million. While that is a large increase in debt, it is worthwhile to note that current cash was 54.2 million. That means GLUU could almost pay off all their debts with current cash on hand.
As for cash flow, the numbers are actually quite volatile. In the last four quarters, total cash flow ranged from 34.5 million to negative 17.1 million. The primary reason for the negative cash flow is due to the acquisition of Cie Games.
As for income, for 2011 to 2013, GLUU has run a net loss of approximately 20 million each year. The third quarter of 2014 showed their first profitable quarter of note with net income of 20.4 million. This swing to profit was largely due to the Kim Kardashian Hollywood game. For a company in growth stages as GLUU is, the lack of profits is not a major concern since a primary reason for the little to no profits is reinvestment of earnings.
Something else to boost confidence is the fact that GLUU consistently beats earnings estimates every quarter. This is a reflection of a strong company and quality management.
5. If I had the money, would I want to buy this company outright? Based upon what I know, GLUU is a company that I would be glad to own. The primary points here are the strong management and overall growth. It is definitely a company I am glad to have in my stock portfolio.
An important thing to note about GLUU is that it is a small cap stock. This means that it is considered a smaller company in the stock market. Smaller companies like GLUU tend to attract more individual investors than institutional investors. This can often lead to greater volatility and less rationality in the stock price. For example, back in July the stock doubled in value in one month, then subsequently lost all that gain in the next few months. All the while, nothing fundamental with the company changed. I mention this as a note of caution, this is a company you will likely need to remind yourself to focus on the fundamentals of the company and not get distracted by the day-to-day swings in the stock price.
This is our INVESTOR IN THE FAMILY rundown on Glu Mobile. If you have any questions or comments, I look forward to hearing and responding in the comments below.
I do want to remind you that the YELLOW ALERT is still in affect. This means that while starting initial positions can be a good idea, entering positions slowly, keeping a large portion of cash, as well as some hedges could also be a wise decision.
Merry Christmas and Happy New Year!
- Brian
P.S. Would you do us a BIG favor and fill out this quick survey to help us serve you better? Thanks!
Current Market Outlook: YELLOWI don't think I'll be able to raise the yellow flag until we get a 10% pullback or greater. Once that happens, a tremendous amount of tension will be released from the markets.
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Each reader bears the full responsibility for any decision to buy, sell, or hold any securities, precious metals, real estate, or other asset class as well as any decision regarding the starting or running of a business. Nothing in this newsletter is to be considered investment advice, a formal recommendation, or solicitation to buy or sell any security. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Investor in the Family LLC may receive payment for promoting some products found in this article. Even so, Investor in the Family LLC aims to promote products that it has tested and believes will add value to readers. Please see full Disclaimer.