Portfolio Update August 2010

Old School Value Stock Portfolio Performance

Time sure does fly. August ends with the Old School Value portfolio down -0.56% and down -14% for the year. The large cash position of 30% cushioned the fall in August while the S&P dropped -4.5%. When including cash, the equivalent performance for the S&P500 is -3.12% at the end of August 31, 2010.

August Transactions

The only transaction during August was the successful tender offer for FIS.

I originally bought 99 shares of FIS @ $27.94 which was successfully tendered at $29. The price of $29 was the low end of the possible scenarios but it still netted a gain of $101 or 3.67% over a 3 week period. Not bad for about 30 minutes of work.

No other transactions took place in August.

Gravity Co (GRVY)

The 2nd quarter results announced by GRVY on Aug 19 was nothing to get excited about. There was only a slight increase in royalties and licensing compared to the 1st quarter. Compared to the previous year, the royalties as well as subscription revenue is down with the trend looking to continue as gamers decay out of the Ragnarok cycle.

The balance statement still remains strong with plenty of cash. Although the top line shows declines in business, cash is being managed well. You tend to see lots of cash burn in micro cap companies with slowing businesses but GRVY looks to be in good hands.

Also, in case you missed the news, GRVY has just started its closed beta testing on August 31 for RO2: Legend of the Second (RO2:LotS). Remember this is where the original RO2 failed due to the horrible gameplay and server issues.

It has taken over 3 years for the company to completely redesign the game and to get back to where it is.

From this point, the closed beta tests will determine the outcome of RO2 and my decision to keep GRVY as an investment.

Here is a good interview with the CTO of Gravity on RO2:LotS and this link is of a Ragnarok blog posting feedback, gameplay and general discussions of the game itself.

Looking at valuation, GRVY is currently valued for no growth with a bleak outcome. With over 3 years of delays, I don’t blame the market for being pessimistic. However, based upon different outcomes of RO2, these are my valuations.

  • Game failure: $1.20 (market wont care that GRVY NCAV is closer to $2)
  • Mild success: $3-4
  • Above average success: $4-5
  • Huge success: $7-10

The valuation range is quite large but keep in mind that this is just a quick estimate. I’m not going to try and predict cents here. What I do know is that if GRVY even surprises by a little bit, expect liftoff.

Insmed (INSM)

INSM sure likes to take its time with taking the company forward. $125m in cash with the market cap at $93m, no debt, no operations. Still no word on the outcome for a strategic review. Makes you wonder whether there ever will be. With all the cash on hand, NNWC is $0.94. From the current price of $0.71, there is a 24% upside to reach liquidation value.

Mastech Holdings (MHH)

Worst performer YTD. Down -32.98% this year. Although the stock price has been dropping, there is still nothing that adversely changes the thesis of the investment. I still see a well managed company worth at least $6 based on 0% growth, 15% discount rate and low ball FCF figures.

What is interesting is that MHH tends to stay still while the rest of the staffing industry rise dramatically on good economic news. TBI and VOLT may be worth another look to play the employment sector.



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11 responses to “Portfolio Update August 2010”

  1. jock says:

    First mail I’ve received. How CLEAR, how HONEST!How UNUSUAL to find this in a stock site. I was drawn by your interview with KIRK, and I’ll stick around!

  2. Jae Jun says:

    Hey Jock.

    Thanks for coming by. The whole purpose of OSV is for me to be honest. After all, the original purpose was to document my thoughts and reasons. No point in trying to make myself look better than I am.

  3. adam says:

    I look forward to your monthly updates because it seems as if we ride the same waves. This has been a tough year so far but I share your optimism. I think you continue to make the right choices in investing and (besides GRVY) I really like your portfolio. I too am waiting on INSM and it boggles the mind. I would recommend TXIC (I know you hate chinese companies but they paid big money for American auditing and PR firms) and HWG. Stay positive, I believe we could both see a rally of risky assets.

  4. Jae Jun says:

    I’m trying to find some quality stocks to anchor my portfolio. Trying to decide whether MDT is the one.
    I’d be interested to know your thoughts on GRVY. Am I missing something?

    It’s not that I hate Chinese companies, I just don’t have very good experience with any Chinese business practices.

    My portfolio is on idle mode these days. I’d be lucky if I can break even this year but with these micro caps, you have good and bad years.

  5. Shuqin Zheng says:

    Hi Jae, thanks for the update. We may just hand in there.

    Any news on GRVY RO2? Thanks.

  6. Jae Jun says:

    @ Susan,

    Be sure to check out the links I put up above in the post to keep up to date with how people are taking in RO2.

  7. dan mcintosh says:

    I am curious about your strategy for INSM. How long are you willing to hold it waiting on action from the board? Thanks.

  8. ValueInvestor-NL says:

    I recently sold my GRVY position (and lost money).

    Yes, the stock still sells at a discount to it’s NCAV. One thing that has changed though, is the drop in revenues from Ragnarok Online in Q1. Their most important market, Japan, showed weakness for the first time in many quarters. This killed the margin of safety for me. I bought GRVY because it was selling below its liquidation value AND I got a nice little cash generating business (Ragnarok Online I) for free.

    I think there is significant risk now that GRVY will start burning cash. Ragnarok Online I revenues are much weaker now. Also I don’t like the fact that GRVY has not been able to publish any succesful game after Ragnarok Online I. For example, a while back they announced they would not be releasing Ice Age Online. Growth from their mobile games has stagnated as well.

    The more I looked at this company the less I liked the management there. They were in a nice position with running a succesful (old) game, but it looks like that time is now coming to an end. They will publish RO2 sometime in the future, I know that. But when that will be, I do not know. (Beta) testing can still take a long time plus the company can *afford* to take a lot of time because they are sitting on a pile of our cash! That’s not a healthy situation for shareholders. It may look like the cash is providing a nice MOS for investors, but the cash also provides the company the opportunity to take a lot of time in developing products and to keep some of their incompetent people in place.

    Also there is no guarantee that gamers will like RO2 when it is finally released. RO2 could be a failure financially. It has failed gamers’ expectations before. Or it could simply replace the slowly dwindling RO1 revenue and not add any extra value.

    Anyway that’s just my two cents. I made a big mistake on this one by not selling earlier. I still have a lot of trouble in deciding when to sell. I remember evaluating my position when the stock reached $2. The price no longer warranted a position then IMO, but I decided to stick around and wait for the release of RO2. That was a huge mistake, because waiting for a game that has been in the making for several years does not make any sense when the price of a stock like this is around it’s NCAV.

    I felt that holding the stock would only compound that mistake. RO1 is slowly winding down, cash burn might well be around the corner and the company has a long history of producing games that do not contribute to the bottom line. There are better opportunities out there at the moment IMO.

  9. Jae Jun says:

    I completely understand and agree that you sold for a good reason.

    I certainly wasn’t impressed with revenue but it has to be seen how much cash GRVY will actually burn. If you look at the cash flow statement, there is not cash burn at the moment. Bottom line is what is important.

    To be honest, waiting for RO2 to come around is tough, but I’m focusing on the business.

    This may seem naive to some, but if a company failed their first sequel and spent 3 years in the making of the new sequel, I believe it isn’t just the same thing. And it’s confirmed by the game graphics, the game engine and the entire gameplay. I read the interviews and the reviews and it is completely different.
    As for the server issue that ruined the first sequel, I highly doubt a company will make the same mistakes again. Good news is that server stability is improving according to certain people involved in the beta testing.

    Upside may not be clearly visible at this point, but the risk has definitely been reduced to a point where I can continue to wait.

  10. Jason Sarasin says:


    I agree it was good to sell if thats what you think. But why even put so much importance on the revenue numbers from the old game? Its a bad investment if you bought the company solely based on RO1 and no RO2. What the revenue numbers tell me is that they still have loyal customers still playing a really old game. And Jae would agree with me that the beta testing proved that there is still a huge following of the Ragnarok BRAND.

    If I am correct current management was put in place in early 2008. Since then they have been able to build a balance sheet that is about as strong as it can get. Also has been able to get a very nice cash flow from a game that is pretty old.

    Looks to me like solid management.

    Just imagine what they pull from RO2.

  11. Jae Jun says:

    @ Jason,

    Good points. The entire reason for buying GRVY in the first place was
    1) NCAV stock
    2) future potential with RO2

    Without knowing the full effect of RO2, it remains a hold in my portfolio.

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