Take-Two Interactive Is Still a Screaming Buy

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend to make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Take-Two Interactive (Nasdaq: TTWO  ) . Are institutions bullish or bearish when it comes to this rebel video game publisher?

Foolish facts

Metric

Take-Two Interactive

CAPS stars (out of 5) ****
Total ratings 1240
Percent bulls 92.9%
Percent bears 7.1%
Bullish pitches 223 out of 237
Highest rated peers Shanda Games, Giant Interactive, Activison Blizzard (Nasdaq: ATVI  )

Data current as of Feb. 21.

Take-Two Interactive may be known for its edgy franchises such as Grand Theft Auto, but as a business its appeal goes much further. Western-themed shooter Red Dead Redemption has sold more than 8 million units since its release last May, and NBA 2K11 has sold more than 4 million units since October, making it the company's top-selling sports simulator.

During the company's recently completed fiscal 2011 third quarter, 14 franchises contributed to results. Revenue fell 7.2% and non-GAAP net profit came up a penny short of last year's $0.53, yet both results soundly beat analyst estimates. A broader portfolio of titles is giving Take-Two a long-overdue growth boost.

Expect further diversification next year. Upcoming titles include extensions of the BioShock and Duke Nukem franchises and new action thrillers XCOM, Spec Ops: The Line, The Darkness II, and L.A. Noire. Also, in April, the kid-friendly Carnival Games side of the business will introduce Take-Two's first game supporting Microsoft's (Nasdaq: MSFT  ) hot-selling Kinect hands-free controller.

That's the good news. The bad is that diversification requires investment and Take-Two has a mixed history when it comes to producing free cash flow. (Though the company has produced more than $185 million in FCF over the past 12 months.) For the most part, Fools believe the company's investments will pay off:

"They've been dinged for being a [Grand Theft Auto] one-hit wonder for years now, but this year they'll see at a nice profit without one. Even without a GTA [series] announced for 2011, they should be able to exceed this year's performance. With a new (and very impressive) BioShock coming in 2012, as well as a likely GTA release, and perhaps a new [Red Dead Redemption], 2012 looks even better," wrote Foolish investor mugwump67 in October. The stock has nearly doubled since.

Institutional ownership history

Top Owners

2008*

2009*

2010*

Latest*

Icahn Capital LP

541,128

8,375,000

12,305,626

12,305,626

OppenheimerFunds

15,425,695

11,845,223

10,898,206

10,898,206

BlackRock

213,256

9,219,963

7,149,842

7,149,842

Harbinger Capital Partners

-

5,800,000

5,800,000

5,800,000

The Vanguard Group

3,357,637

3,615,426

4,348,555

4,348,555

TOP 25 TOTAL

31,964,772

61,578,173

71,001,267

71,001,267

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

Like Fools, most of the Big Money investors believe in a turnaround -- Carl Icahn most of all. His fund had been accumulating shares consistently through last year's Q2 and now controls 14.4% of the company, according to Capital IQ data.

Among fund managers, the highly regarded Westcore Select (WTSLX) fund opened a new position with 256,868 shares purchased in the quarter ended on Jan. 31. Manager William Chester's picks have beaten the S&P 500 by an average of 7.84 percentage points annually over the past five years. If he sees value at recent prices, it's worth taking closer look. Even if Icahn is done buying.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

Activision Blizzard

33.84%

0.76%

Electronic Arts (Nasdaq: ERTS  )

96.91%

0.51%

Nintendo

35.44%

11.09%

Microsoft

64.48%

4.04%

Take-Two Interactive

84.57%

1.02%

Source: Capital IQ. Data current as of Feb. 21.

Take-Two isn't likely to get high marks for its ownership profile. Thanks to Icahn's ownership stake and increasing interest from the likes of Chester and his institutional investor peers, there isn't a lot of room left for Big Money buyers to get in on this stock.

And yet I like Take-Two's position among peers. Electronic Arts is too widely owned; Activision Blizzard has low and dropping institutional sponsorship. Take-Two strikes a balance between these twin towers of gaming that leaves plenty of elbowroom for individual investors buying in small chunks.

What's more, Take-Two's cheap valuation should convince more small investors to take a chance on the stock. Yes, I said cheap. Consider GTA. This is a franchise that's capable of generating $500 million in sales in one week. What's that worth? I'd argue at least $1 billion in market value.

Now consider the company's 2010 result. In a non-GTA year, Take Two produced $1.22 billion in revenue, nearly equal to its $1.32 billion in market cap. Do you really believe the stock will trade for a zero premium to revenue when a new GTA series is introduced? You know better. So do I, which is why I've rated the stock to outperform in my CAPS portfolio.

Do you agree? Disagree? Let me know how you would rate Take-Two Interactive using the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Activision Blizzard, Electronic Arts, Microsoft or Take-Two Interactive to your watchlist.

BlackRock and Microsoft are Motley Fool Inside Value picks. Activision Blizzard and Nintendo are Motley Fool Stock Advisor selections. Take-Two Interactive is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended subscribers open a synthetic long position in Activision Blizzard and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Activision Blizzard, Microsoft, and Take-Two Interactive and is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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