Buy Insurance For Your Activision Shares and Sleep Better Tonight
Ken is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This week is a good time to consider getting defensive to protect your position in Activision Blizzard, Inc. (NASDAQ: ATVI). Bloomberg News reports that an unnamed source “with knowledge of the situation” revealed that Vivendi is planning on selling its 61% ownership stake in Activision. The sale could potentially take place on the open market. You don’t need to live your life glued to CNBC to know that this could put substantial downward pressure on Activision’s stock.
Astute market watchers do not need to be reminded that making investment decisions based on anonymous sources leaking information about supposedly private plans is a quick way to lose money. Typically, I toss these types of stock rumors in the trash next to the mailings I receive about the next penny-stock get-rich-quick scheme.
So, why act this time? The simple answer is because I believe Vivendi will act to rid itself of its Activision stake. Vivendi is undergoing a transition after its CEO quit. It has a sizable debt burden and its stock has been a model of underperformance for the past 5 years. Because Vivendi controls the majority of Activision shares, it can do any number of things to shake up the company. Michal Pachter, an analyst at Wedbush, suggests an alternative scenario to a straight sale is to load Activision with debt, pay out its cash as a dividend, and spin the company off of Vivendi’s books.
Cover Your Assets
The only people who truly know Vivendi’s plans for Activision are sitting in a boardroom in Paris. The world will know soon enough, but I want to cover my assets before the fire sale and/or debt party begins. One strategy is to sell before the announcement. Ditching your shares is a sure way to avoid potential pain. The problem with selling out now is that you miss the upside to owning Activision over the next 5 years.
In my estimation, a better strategy for long-term Activision bulls who are nervous about the impending Vivendi announcement is to purchase a little insurance for your shares in the form of put options. Buying a put gives the owner the right to sell 100 shares at a predetermined price (or strike). I’m not worried about a little 5% drop in my shares. Instead, I am looking at buying inexpensive puts around the 10 strike. If I purchase this option, I am paying a small price to insure my shares against a catastrophic sell off. Any drop below $10/share would not effect me a put buyer with the 10 strike. A good source for reading more about put options is this free Motley Fool report.
The key to being willing to purchase insurance instead of selling Activision shares outright is believing in the company’s long-term prospects. These are a few good reasons to hold onto your shares:
- .18/share annual dividend (up 9% from last year)
- Huge share buyback program that is steadily reducing share count
- Pristine balance sheet with approximately $3.5 billion in cash and short-term investments as of March 31. This means nearly 25% of Activision’s market cap is in cash.
- Wildly popular games including Call of Duty and The World of Warcraft.
- Better than the competition. Electronic Arts, Inc. (NASDAQ: EA) sells at price 57 times earnings compared to Activision's p/e under 15. Take-Two Interactive Softward, Inc. (NASDAQ: TTWO) and Zynga, Inc. (NASDAQ: ZNGA) both showed a loss in its last quarter. Only the Chinese gaming companies like Perfect World Co., Ltd have less expensive multiples (I detailed my bullishness for Perfect World in this article).
Long-Term Investing With Options
As a long-term investor, I like to focus on the operations of the companies that I own rather than the erratic movements of ticker prices. I own shares in Activision because I believe in the business. That being said, Vivendi’s potential sell of its majority stake in my company makes me want to protect my shares. I don’t want to jump out and don’t see a good reason to ride the share price down. I also don’t trust the anonymous source in the Bloomberg article. The best plan to help me sleep at night is to purchase a little portfolio insurance. A put option will seem like a brilliant move if the stock craters and the small premium I pay will shortly be forgotten if the Vivendi announcement is met with a shrug by Mr. Market.
BoiseKen owns shares of Activision Blizzard and Perfect World. He is also short a July covered call on Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.