More “Pit Bull” Plays from Mt. Vernon

By Travis Johnson, Stock Gumshoe, October 15, 2009

Yesterday we looked at the “one shot” heart disease biotech stock from Marc Lichtenfeld, who’s one of the group that Mt. Vernon Research is calling their “pit bulls” as they pitch the special report with some favorite picks from the gang.

And lo and behold, they go on to tease a bunch of other investments in addition to that prominently featured biotech stock — let’s find out what they are, shall we?

The first one is a video game software company … here’s what they tell us:

“New Website Draws Over 600 Million Hits for this Software Giant… You Could Make Gains of Over 344%…

“Pit Bull” Play #2: The gaming industry pulled in $21 billion last year…

“And this software powerhouse continues to dominate its competition with innovative products… like a new online sports gaming website that allows sports fans to interact and compete online… drawing over 600 million hits since it went live recently.”

Sounds pretty good, right? And not too tough for your favorite Gumshoe, since there aren’t all that many game software companies. Some more clues to be sure?

“It’s cutting-edge products, like this new gaming website, has kept this company growing at a fast pace with… the most titles that are able to function on more than one computer operating system… the most sales… the strongest balance sheet among its competitors….

“Revenues for this gaming giant rolled in over $4 billion over the past 12 months – 15% higher than the same period last year – despite the volatile market.

“The company ended the 2008 fiscal year with cash and short-term investments of over $2.5 billion… and virtually no debt….

“Like its newly released military game that’s expected to pull in millions as a tie in to a popular action film hero… Joining the other 30 titles in 2009 that have already passed the $1 million mark.

“And this company is not slowing down… with over 80 new games coming out in the next few months… on not just one platform… but multi-platforms – like PC Games, Wii, Xbox 360, Playstation 3, Playstation 2, Nintendo DS, and iPhone/iPod games.”

So that must be … Electronic Arts (ERTS), the old standard-bearer for gaming software. They’ve had a couple tough years as the hits slowed down and they started to rely more and more on the aging Madden NFL franchise, but they remain one of the two dominant gaming companies when it comes to console and PC games. The other is Activision Blizzard (ATVI), which I personally prefer and have profiled for the Irregulars, but ERTS is more of a “unrecognized value” story at this point, since they still get a bit of a sneer from many investors after their massive swoon (over the past two years ATVI is about flat, ERTS is down something like 60%).

The website that they refer to in the tease is, I assume, EASports.com, which is their ongoing effort to create a more integrated online community among their sports game players, who already play online through their closed game console system that can connect players for head-to-head matchups. As of the last report I saw they had hosted about 600 million matchups, though I think that number is for the console game connections, not for this community website.

They do have 31 titles that are expected to surpass $1 million in sales, and I assume the “newly released military game” is probably the GI Joe movie tie-in, which went on sale in August. I have no idea whether or not it’s selling well. The $4 billion in revenue is about right, and it’s worth noting that the revenue numbers are pretty similar for ATVI, even though Activision Blizzard is much larger (market cap of about $13 billion for ATVI, about $7 billion for ERTS). Both companies also have a ton of cash and no debt, though it’s more dramatic for ERTS (they have about $7 per share in cash, more than a third of their market value). ERTS is not profitable but is expected to return to profitability next year, with a projected forward PE of about 18, ATVI is currently profitable (barely) and has a forward PE of about 16, just for comparison’s sake.

So … whaddya think? The reason I prefer ATVI is largely because of their subscription model for the Blizzard half of the empire, which runs World of Warcraft, the most popular multiplayer online game in the world, though they also have their share of hit console games like Guitar Hero and Call of Duty and Tony Hawk. Gaming is the sector of the entertainment biz that I like most right now, but it’s also a business driven by innovation, sometimes unpredictable hits, and acquisitions of little game studios with hot ideas, so either of these big players certainly has the potential to do well from here. Let us know if you like any of them, or none, or if you prefer something like, say, one of the Chinese online gamers instead, or Nintendo, or whoever … the comment submission box below awaits your wit and wisdom.

In the meantime, we’ve got a little more to uncover from our “pit bull” friends …

Karim Rahemtulla touts a healthcare stock, and apparently a specific kind of trade on that stock:

“Healthcare’s $20 Billion ‘Dark Secret’

“‘Pit Bull’ Play #3: When it comes to healthcare investing, biotech companies tend to get the headlines. But there’s a new sector emerging in the healthcare industry that could be just as lucrative…

“While it’s not as ‘sexy’ as a new life-altering drug… it does make a LOT of money – and it’s in high demand.

“In fact, over 73 million Americans suffer from some type of treatable mental illness… and mental health treatment has exploded into a $20 billion annual market… a “dark secret” no one likes to talk about.

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“That’s why one of our top “Pit Bulls” is recommending this little-known health provider… because it’s potential for growth is phenomenal…

“Fortune magazine just named it ‘one of the fastest-growing’ companies in the nation.

“Over the past five years, this small-cap’s revenues and earnings have surged at double-digit rates, with earnings growth consistently close to 30% annually. And the stock is trading at less than seven times 2009 earnings. For a pure play in a sector that will continue to grow… that’s cheap by almost any valuation.

“But yet, the stock has fallen 21% over the last year. This beat down is overdone, given that the company is still likely to grow its earnings by at least 20% year-over-year.”

This must be Psychiatric Solutions (PSYS), the leading operator of freestanding mental health facilities in the country — they’ve been growing aggressively through acquisition over the last several years (and they’ve been teased before (I wrote about them about two and a half years ago when they were teased by the Oxford Club at a little under $40, they’ve had their challenges since and the shares have only recently recovered to the near-$30 range). I haven’t looked closely at these guys recently, and one never knows with serial acquirers or with health care facilities that rely on government and insurance company contracts, but on the surface it does look like you’re getting some relatively inexpensive growth.

Rahemtulla goes on to say that he doesn’t recommend just buying the stock, but instead a more conservative strategy that provides some income — based on his past behavior and predilections I’ll guess that he’s recommending a covered call strategy… and, to be fair, this tease looks like it was probably written a couple months ago (that’s not unusual, it often takes a while for them to throw together an ad), the stock was a little cheaper then and did trade at a PE of about 9, it’s currently a forward PE of more like 11. If you don’t know what a covered call strategy is, that would be buying the stock and selling calls against it — for example, buying it at $28 and selling the January $30 call option for $1.50, so you get close to a 5% yield for three months just for holding the shares, and if they get called away at $30 because the stock goes up higher your return is limited to about 13% or so ($3.50 — the $2 from $28 to $30, plus the $1.50 you got for selling the call). Of course, if the stock goes down or stays flat you still own it, for good or ill, and you keep the $1.50. That’s just a guess, he didn’t tease the details of his strategy to any great degree.

“‘Pit Bull’ Play #4: ‘The New Coal’

“As countries look to avoid the devastating environmental damage done by coal… the Energy Information Administration projects this “New Coal” alternative is rapidly gaining popularity… with demand projected to increase by 47.1% worldwide over the next few years.

“And as America looks to cut its dependence on foreign oil – and reduce pollution – there exists no better alternative than this “New Coal” replacement. New supplies, improved technology and less expensive transportation costs are helping this alternative energy play an increasingly important role in the clean generation of electricity and fuel.

“And as this replacement fuel gains widespread acceptance… its market share prices will explode…

“And the best way to profit from the coming alternative energy boom is with an investment in a proven, but little-known, strategy from Lee Lowell that offers the potential to provide phenomenal returns from this alternative fuel commodity – while taking on very little risk…

“In fact, so far this year, Lee has a remarkable 87% win-rate using this strategy at