The Tycoon Report

Have you dumped these 2 stocks yet?

Wednesday, July 26, 2006 | Wayne Mulligan

Well, I always told myself I would never be the guy that said, “I told you so!”, so I won’t start now.

But what I will say is that I sincerely hope you took my advice and got VeriSign (Nasdaq: VRSN) and Activision (Nasdaq: ATVI) out of your portfolio when I told you to.

I wrote about VeriSign only a few weeks ago in my July 5th Tycoon Report article.  I felt then, and I still do now, that this company is exposing its investors to a lot of downside risk.

Basically this is the situation with VeriSign in a nutshell:

1.  The company is on an acquisition binge. The majority of the time, serial acquirers fail to perform as well as expected.

2.  The company’s income statement isn’t accurately reflecting its current financial situation.

3.  The company’s Return on Equity – the primary gauge for management effectiveness – is declining.

That’s why the stock is already down over 17% from when I talked about it 3 weeks ago!

The company has some fundamental flaws in its underlying business, so it's acquiring other companies to "make up" for that – never a good strategy.

As Warren Buffett is fond of saying, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Oh, how true that is!

Also, VeriSign is making a concerted effort to package its financial statements in a way that makes its results appear more favorable to investors.  That, in and of itself, has me worried about this stock.  You just don’t know what to expect.

So even though it’s already down almost 20%, it could still reasonably drop another 20% - something I certainly wouldn't want to be around for.

Like I said, I’m not here to pat myself on the back or say, “I told you so.”  I’m just here to provide the facts and make sure you don’t get hurt on situations like VeriSign.

Another stock I think has a lot of downside potential is Activision.  I wrote about this company in my June 21st Tycoon Report article .

Here’s the rundown on Activision:
  
1.  ATVI has terrible margins and Returns on Equity.

2.  Their stock has been trending downward and underperforming the rest of the market.
  
3.  Delays in “next generation” gaming consoles will keep pressure on revenues and profits.

4.  The company has shown losses in 3 of the last 4 quarters.

5.  Questionable accounting issues could keep a black cloud over this stock for quite some time – regardless of how the business performs.

6.  At a P/E of 80, I think this stock could fall a lot more over the short term – especially if we see it break support at $10.

Although this stock hasn’t fallen like a rock (better yet, like a VeriSign), my ideas for why it COULD still stand.

The company has a weak business.  Most software companies have profit margins and returns on equity in the double digit range.  Activision’s are under 5%!

The company has even been losing money in 3 of the last 4 quarters, and the accounting issues that have been raised recently stand to decimate this stock if any of them can be substantiated.

Over the past few weeks, even more news has come out on this company and made me even more bearish on the stock.

For instance, on Wednesday July 19th the company announced that it was the subject of a shareholder lawsuit related to its option granting practices.

As I’m sure you know, the SEC and shareholders alike are on a witch hunt for companies engaging in “shady” options practices like backdating options or using “spring loaded” options grants.

FYI: 

Backdating options is a practice companies use to literally “backdate” options contracts for executives, in order to take advantage of lower prices earlier in the year.  This pretty much guarantees profits for whoever those options are issued to.

Spring-loading is when a company issues options to employees right before a favorable announcement about the company is about to come out.  This way the options will be profitable in a very short period of time.

So unless Activision reports stellar earnings on August 3rd, I don’t see this stock having any significant upside potential in the near term – all I really see is a lot of downside here.

And any stock with more downside than upside is not one I’d like to have sitting in my portfolio ready to take away all my hard earned dollars … would you?

As I always say, one of my primary goals is not to help make you money, but rather to protect the money you already have.  And that's what really sets the Tycoon Report and Tech Stock Insider apart from everybody else out there. 

We're here to take the time to help you learn more about the market, make profitable investments and, most importantly, protect yourself from making unprofitable ones as well.

Until next time …





Wayne Mulligan
Contributing Editor
The Tycoon Report