If you are looking for the best ideas for your portfolio you may want to consider some of Alta Fox Capital’s top stock picks. Alta Fox Capital, an investment management firm, is bullish on Nintendo (NYSE:NTDOY) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Nintendo (NYSE:NTDOY) stock. Nintendo (NYSE:NTDOY) is a consumer electronics and video game company.
In July 2019, Alta Fox Capital had released its Q2 2019 investor letter. Nintendo (NYSE:NTDOY) stock has posted a return of 45.0% in the trailing one year period, outperforming the S&P 500 Index which returned 16.2% in the same period. This suggests that the investment firm was right in its decision. On a year-to-date basis, Nintendo (NYSE:NTDOY) stock has risen by 35.6%.
In Q2 2019 investor letter, Alta Fox Capital said the fund posted a return of 10.2% (net) in the second quarter of 2019, outperforming the S&P 500 Index which returned 4.3% in the same period. Let’s take a look at comments made by Alta Fox Capital about Nintendo (NYSE:NTDOY) stock in the Q2 2019 investor letter.
“Nintendo needs no introduction. After all, it was founded in 1889! The Japanese-based firm has the best collection of intellectual property within the video-game industry through various characters and brands such as Mario, Zelda, Super Smash Brothers, Pokémon, which are recognized and adored by multiple generations of fans.
Our thesis on Nintendo was (and still is) rather simple. We purchased the company for <13x forward earnings on an ex-cash basis. This is a steep discount to most of its U.S-peers despite Nintendo growing faster, owning better long-term brands, and having more upside optionality. Nintendo has failed investors in the past with disappointing hardware results at times (i.e. the Wii U device) which likely explains the valuation discount today. However, the market has structurally improved for Nintendo since the Wii U disaster. The migration from physical copies of games bought at places like GameStop (“GME”) to digital downloads is greatly beneficial to Nintendo for a few important reasons. First, it increases their margin significantly as they do not have to pay the middleman. Second, it reduces new console risk. Consumers can now upgrade their hardware while keeping their game library. This change mitigates the primary risk that existed during the Wii U days. Finally, digital downloads are more convenient for the consumer (and should lead to more consumption other things being equal) and open up new forms of monetization such as the “freemium” model. Sometimes investing theses do not have to be that complicated and that is the case with Nintendo. The company is too cheap given its timeless intellectual property, shift towards higher margin and more recurring revenue, and strong balance sheet.
The video-game market can be a difficult one for long-term investors given the fad nature of many games and a fickle consumer base. With Keywords Studios and Nintendo Co., the fund has made a bet on the “picks and shovels” supplier to the videogame industry and the company with the most enduring intellectual property. Both companies should be able to capitalize on the video game industry’s long-term growth without the typical fad risk associated with many of their publicly traded competitors.”
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Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.