Peter Lynch made famous the idea of using local information about changes in buying habits and behavior to "invest in what you know" to get ahead of professional investors. The idea is that trends can be spotted "on the ground" before earnings and stock prices have adjusted to the change in fundamental prospects for a hot product or company. A mirror of this concept in a bear market is to short what you know — find companies that are losing competitive stature and bet against them before the institutional investment community realizes circumstances have changed for the worse. I had success with an example of these last year — betting against ANF based on insight I felt I had about how Abercrombie was losing "it" status with teens.
Here are some things I "know" from my local environment:
- Our household is filled with tweens and teens, and the various stand-alone gaming systems we own — PS2, WII — go basically unused. The endless drumbeat of requests for new $50 titles to feed these systems has also tapered off. No new Madden, no new Lego Star Wars, no new Sims. We have a plastic bag of portable gaming devices — Gameboy Advance, Nintendo DS 2 — that are also dormant.
- My kids spend more and more time online. They don't play the Sims on the PS2 or after loading a CD Rom into a PC (we have both formats). They play Farmville on Facebook, obsessively. They play addicting games. They watch Youtube videos. The bottleneck in our household is access to the iMac and PC machines, not dedicated gaming consoles. To the extent they play games on portables, it is apps on ipods (they crave iphones but know I'm not getting them). I know I am not unique in this respect — I see this with other families as well.
- We used to go to Gamestop quite frequently. We have not been there in months. I have been to the Apple store to buy a macbook. We picked up a new a new Nano at Costco for a family vacation. Apple, Facebook and Google are gaining share of mind, time and wallet in our household.
What's the big picture? Video killed the radio star, and broadband is killing a host of high margin, consumer businesses based on expensive-to-build and expensive-to-deliver proprietary hardware and software. Yesterday video game software sales for September were announced, and the results were lower than expectations. Notwithstanding Tom's love of the product, Guitar Band Beatles or whatever it is called is a sales disappointment. Who do you know who has bought Madden 10? It is not that people have stopped playing games or seeking interactive entertainment, it is that they are getting access online and often for free. Online access from a universal device is cheaper, better and faster than stand-alone, single function systems.
Gamestop, Electronic Arts, Activision and THQ all vulnerable. They are also all overvalued. Activision was on Tim's list yesterday, no doubt because of his chart reading and chart reading alone. It is on my list for fundamental reasons. Do your own homework, read your own charts. But this is a sector with tens of billions in market cap that is slowly losing relevance, and that market cap can go evaporate quickly once professional investors catch up to what is happening in households as we speak. For now, portfolio managers think we are returning to an era where gaming companies are hot growth plays that deserve lofty multiples. Economic downturn or no downturn, the tide is going out on these companies.- -