Reviewing Our 2013 Picks: MPEL, MSG, TTWO, YHOO, FL

5th Street Research

5th Street Research’s Buy Recommendations Easily Outperform The Market

Having been away from the market with other obligations for the past month or so, I thought it would be interesting to review our 2013 picks before making any new recommendations in 2014. Since launching in late September, we have published buy recommendations on 5 different companies: Melco Crown Entertainment (MPEL), Madison Square Garden (MSG), Take Two Interactive (TTWO), Yahoo (YHOO), and Foot Locker (FL). While the S&P 500 and Nasdaq finished out the year strong, our picks have easily outperformed the broad markets, returning an average of 16.5% vs. 7.5% for the S&P 500. A brief update on each of our recommendations below…

Melco Crown Entertainment (MPEL): City of Dreams Manila and Studio City Macau

Buy Recommendation
Published 9/27/2013: The Best Bet in Macau is Melco Crown Entertainment (MPEL)
Price Then: $31.60
Price Now: $42.99
% Change: +36%

MPEL

Macau as a whole has been the recipient of quite a bit of attention around here since launching, and for good reason… Macau has been the world’s fastest growing economy over the past decade with average annual GDP growth near 15%. It generates more than 7x  the revenue of Las Vegas and is the gambling epicenter of the world. Melco Crown’s City of Dreams is one of the most impressive properties in Macau and dominates the ultra important “Premium-Mass” market in the region. MPEL’s revenues and profits stand to explode over the next two years as they open two new massive properties, Studio City Macau and City of Dreams Manila. Studio City boasts the best location on the Cotai Strip, Macau’s version of Las Vegas Blvd., and is poised to be one of the biggest beneficiaries of the continued growth of the Macau. Despite the 36% gain since our initial recommendation of their shares, I continue to view MPEL as a strong buy for the foreseeable future.

Madison Square Garden (MSG): Hidden Assets and Rising Sports Franchise Valuations

Buy Recommendation
Published 10/11/2013: Significant Value in Madison Square Garden (MSG)
Price Then: $57.54
Price Now: $56.72
% Change: -1.4%

MSG

Madison Square Garden has been the laggard of our model portfolio thus far, currently down 1% since our original recommendation. The New York Knicks have gotten their season off to a terrible start this year, however there has been little to no other news or events out of MSG in the past 3 months. With the Madison Square Garden renovation project finally complete, cash flows and earnings will start becoming normalized for the first time since their IPO. The real story here though remains the hidden value of the company’s array of assets. As the owner of the Knicks and Rangers, MSG Networks, Madison Square Garden Arena and its associated air rights, and numerous other venues/ assets; MSG remains greatly undervalued when using a sum of the parts analysis. This one may require some patience, but I continue to view MSG as a strong buy.

Take Two Interactive (TTWO): Massive Cash Hoard, Best IP Portfolio in the Industry

Buy Recommendation
Published 10/15/13: GTA V Makes Take Two Interactive (TTWO) a Steal
Price Then: $16.94
Price Now: $17.80
% Change: +5%

TTWO

Although shares of Take Two have appreciated since our recommendation, they have lagged the market, which is somewhat perplexing after Grand Theft Auto V shattered analyst estimates and became the highest grossing entertainment release ever. While analysts anticipated TTWO would sell 18 million units of GTA V during their most recent quarter (a number I reported would prove to be very low), 25 million copies were actually sold. TTWO stock failed to jump on this news though, they actually traded down sharply the next few sessions as management failed to give much clarity regarding their future pipeline/ next blockbuster release. TTWO’s haul from GTA V should leave the company with more than $1B worth of cash on their balance sheet. With a market cap of only $1.6B, this cash hoard is substantial. Take Two also owns arguably the most valuable intellectual property portfolio in the industry with proven franchises such as GTA, BioShock, Red Dead Revolver, Max Payne, and NBA 2k. Despite management remaining mum on the next big release for now, they have an amazing track record when it comes to making hits. Everything considered, I see fair value for Take Two stock between $22-$24, at least 25% upside from today’s closing price. I maintain a buy rating on shares of TTWO.

Yahoo (YHOO): Alibaba Stake Continues to Create Value, Meyer on Acquisition Spree

Buy Recommendation
Published 10/15/2013: Amended Alibaba Agreement Makes Yahoo (YHOO) More Attractive
Price Then: $33.38
Price Now: $41.03
% Change: +22.9%

YHOO

As Alibaba continues their rapid growth, Yahoo continues to reap the rewards. Despite a core business that is still struggling to gain momentum, Yahoo had a great 2013 with shares more than doubling during the year. New CEO Marissa Mayer has been on quite the shopping spree since taking the helm, with Yahoo acquiring 28 companies in 2013, including a $1B purchase of Tumblr. Mayer has made it clear that she intends to ensure Yahoo remains the world’s homepage while also placing a large emphasis on mobile and content creation. In a demonstration of their commitment to content, Yahoo recently hired Katie Couric as a ‘global anchor’ and released a new News Digest App. It is yet to be seen how any of this efforts will pan out, but if nothing else, Mayer has been ambitious. YHOO should still see some upside from Alibaba as it nears its inevitable IPO and could get a lift from the news when announced, but shares aren’t as much of a bargain as they were 3 months ago. If you already own YHOO stock I wouldn’t be in any rush to sell it, but I wouldn’t be in any rush to go out and buy more either. I view shares as undervalued still with 10-15% upside, but would need to see core operations start to show signs of improvement before considering YHOO a strong buy at current levels.

Foot Locker (FL): Buy into Nike, Adidas, and Under Armour’s Growth at a Discount

Buy Recommendation
Published 10/26/2013: Try Foot Locker (FL) on for Size
Price Then: $34.20
Price Now: $41.11
% Change: +20.2%

FL

Last but certainly not least of our recommendations during 2013 was Foot Locker. The athletic apparel industry has been one of the strongest performers of the past 25 years. Nike is one of the all time great growth stocks and shows no sign of slowing momentum. Adidas and Under Armour fit the same mold. Justifiably so, all three of these companies trade at lofty valuations. Foot Locker is the largest retailer of athletic shoes in the US, dominating the market with the portfolio of brands including FootAction, Eastbay, Champs, and of course their namesake stores. Management has proven to be shareholder friendly, approving a $600 million buyback and an 11% dividend hike last year. While many retailers reported lackluster earnings in their most recent quarter, Foot Locker easily exceeded both earnings and revenue estimates. Despite all of this, shares still trade at a significant discount to retailers such as Finish Line and Dick’s Sporting Goods. The athletic apparel industry has shown no signs of slowing, and Foot Locker is as well positioned to benefit from this trend as anyone. As long as they continue to trade at such cheap valuations relative to their peers, I will continue to maintain a buy rating on shares of FL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

Remaining Disciplined In Today’s Fast Paced Markets

5th Street Research

Selecting Quality Investments Can Be Difficult, Keep Things as Simple as Possible

Managing one’s own investment portfolio is a daunting task for most people. The amount of information to process and the speed at which it is made available leaves most individual investors feeling overwhelmed, often resulting in frustration and a few losing trades before deciding to leave the job in the hands of a professional. In reality these “professionals” face many of the same challenges you do and commonly fail to outperform the market as well. The individual investor has a few distinct advantages that the typical money manager isn’t afforded, most importantly the ability to focus your investments in a small group of top ideas and being able to maintain a long-term investment thesis without worrying about day-to-day gains to appease clients. By identifying your own strengths and weaknesses, and focusing your efforts selecting investments within your own areas of knowledge, the individual investor can consistently beat the market once developing confidence in a strategy and learning to maintain discipline .

Find an area of expertise and focus your efforts in a specific niche

Self-awareness is a prerequisite of successful investing. While there are countless strategies you can use, tons of unique financial products you can trade, and a vast array of sectors and companies one could analyze; it is only necessary to find a niche that you excel in and concentrate your time there. If you are a momentum trader don’t spend time analyzing a company’s EV/ EBITDA ratios, you should be scouring through charts of the biggest % movers on the day. If you find you have consistent success picking small cap stocks, don’t spend time analyzing the potential impact of Microsoft’s new Surface tablet on their financials, instead scan though all companies listed on the NASDAQ with a market cap less than $400 million. Have an exotic option strategy that consistently nets small wins? Concentrate your efforts on trading that specific strategy until it no longer works. Having tunnel vision in this sense allows you to filter through the vast array of data and commentary thrown at us everyday, focusing on and employing only on that which is pertinent to your investment methodology. There is much more value in being a master in a specific niche than being merely proficient in a wide array of areas. This is the first component of being a disciplined investor.

Have a predetermined plan when entering a position, stick by your investment thesis

The second principle of disciplined investing comes in the form of being prepared for any scenario that could unfold in your positions before entering them. If you are a value investor your investment thesis is dependent upon identifying companies who are being unfairly valued by the market for any given reason at the time. You should enter into a position only after determining a fair valuation range for the equity based on underlying fundamentals that will ultimately prove stronger than the current unjust market sentiment. Without news of anything that would adversely effect the value of the company, day-to-day or even month-to-month swings in the share price are of no importance until the business achieves a fair valuation or the fundamental picture changes and renders your investment thesis invalid. To have any success as a value investor this thought process is imperative if you hope to avoid cutting losses prematurely and to maximize your returns when your ideas pan out, remaining invested until fair value is reached. Conversely, if you base your trades on a technical strategy it is of utmost importance to adhere to a strict set of rules that are reactive solely to price changes, paying no mind to the fundamental picture backing the position. Before entering a trade you must know where you will cut losses and where you will take profit as predetermined by the technical strategy you employ. Knowing how you should react regardless of what scenario unfolds in a position, and adhering to these principles at all times, takes the guesswork out of investing. Through due diligence in your field of expertise, you identify a trade or position to enter for specific reasons relevant to a strategy you know you can deploy successfully. Knowing how you will exit beforehand takes the human elements of fear and greed out of the equation, allowing only rational actions that ensure the integrity of the strategy and investment thesis.

Always Analyze and Look To Refine Your Investment Methods

The third and most important trait of the disciplined investor is the constant need to analyze and improve upon ideas and strategies when possible. Many investors fall victim to early successes, focusing on the positive results of a trade, rather than analyzing what went right and what could have been done different to possibly capture a greater return on investment. It is easy to get caught up in the power of a bull or bear market and either assume that what you are doing is genius if working, or abruptly lose faith in a strategy that may prove to be great in the long-run if the market initially turns against you. Doing so causes one to miss out on future profits unless sufficient time is spent reviewing and critiquing their trades. Technology has afforded us many means by which we can back-test strategies, test new ideas in live market simulations, share and analyze methodologies with our peers, collect historical records of our trades, and visualize all this information in a way that we can derive meaning from a seemingly endless supply of data. If one hopes to have long-term success as an investor, they must constantly look to refine their thought process and become more proficient in their niche. The world of finance is constantly evolving, to stay ahead of the curve you must do so as well. The almost incessant need to analyze your successes and failures and use this knowledge to constantly improve as a trader is the third and most inherent quality of the disciplined investor.

Putting It All Together

Investing is a life-long learning process we must all go through to achieve financial success. There is no right or wrong strategy to adhere to forever, nor is there a universal methodology or thought process that will ensure outperformance. Take the necessary time to understand what you are comfortable trading, figure out where your area of expertise is, and carve out a niche for yourself. Develop the confidence in your ideas necessary to formulate and stick with a plan before ever entering a position, regardless of what scenario unfolds. Last but not least, always look to analyze successes and failures, and seek out ways to use what you discover to improve future returns. Markets get more confusing and complex by the day, and we are constantly presented with new, seemingly irrelevant data and observations. Only by remaining disciplined and focusing on the information pertinent to you and your investment thesis, can you hope to achieve consistent success. When you find your niche stick with it and master, you will be rewarded in the long-run.

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Welcome to 5th Street Research

5th Street Research

5th Street Research: Independent Equity Analysis

Founded in 2013, 5th Street Research is an independent provider of investment analysis and equity research. We strive to provider unbiased, clear and concise information, highlighting companies that either present significant value or carry a high level of risk at their current valuation. Over the next few days we will be publishing our first reports here, starting with an analysis of Melco Crown Entertainment (MPEL) a resort/ casino operator with a strong presence in Macau. Be sure to follow us on Twitter @5thStResearch.

Joseph Urgo

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