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Is Take-Two Interactive Software (TTWO) Still a Great Investment Pick?

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Merion Road Capital Management, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of 11.2% was reported by the fund’s Long Only Large Cap Fund, while its Long Short Small Cap Fund delivered a 14.0% gain in the second quarter of 2021, outperforming its Russell 2000, Barclay Hedge Fund, and S&P 500 benchmarks that delivered a 4.0%, 4.0%, and 8.4% returns respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Merion Road Capital Management, the fund mentioned Take-Two Interactive Software, Inc. (NASDAQ: TTWO) and discussed its stance on the firm. Take-Two Interactive Software, Inc. is a New York, New York-based video game company with a $19.08 billion market capitalization. TTWO delivered a -21.16% return since the beginning of the year, while its 12-month returns are down by -6.60%. The stock closed at $163.82 per share on August 24, 2021.

Here is what Merion Road Capital Management has to say about Take-Two Interactive Software, Inc. in its Q2 2021 investor letter:

"Take-Two also announced strong earnings and long-term outlook. While last year was a bit of an anomaly, it’s impressive that their key franchise (Grand Theft Auto) grew revenue from $700mm to almost $1bn in the fiscal year – keep in mind that it has now been over 7 years since their last full game release. Similarly, the NBA 2K franchise has continued to grow its user base which now stands at 2.3mm daily users. As the business model continues to shift to more recurrent spend, now at 60%, TTWO revenue becomes more stable, higher margin, and less dependent on key man risk. Additionally, the company has many shots on goal to generate a windfall from IP with a pipeline of 60 games to be released over the next 3 years (9 of which are iterations of previously released titles, ergo less risky)."

NBA, NBA 2k, Kobe, Basketball
NBA, NBA 2k, Kobe, Basketball

Photo by Ramiro Pianarosa on Unsplash

Based on our calculations, Take-Two Interactive Software, Inc. (NASDAQ: TTWO) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. TTWO was in 55 hedge fund portfolios at the end of the first half of 2021, compared to 41 funds in the previous quarter. Take-Two Interactive Software, Inc. (NASDAQ: TTWO) delivered a -11.77% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.

Disclosure: None. This article is originally published at Insider Monkey.