Balancing risk and reward is the key to a stable and growing stock portfolio, which sounds easy enough, but is anything but. Investing in startup microcaps comes with high risk, but high potential reward. Putting your money in megacap corporations of course is low risk, but low reward. Every now and then though, gems show up that reposition the balance towards lower risk but higher reward. Those are the stocks that deserve the most attention.
One way to find stocks like this is to look for companies that know their industry well and have been operating for a long time, but due to past mistakes have been forced to clean house and reboot their balance sheets. Business connections are kept intact, many existing contracts maintained, clients remain, and all the potential for growth is there without the need to start from scratch. Majesco Entertainment Co. (NASDAQ:COOL), a digital video game developer, is a prime example.
Majesco has been in operation for over 15 years. The company began in the video game retail market, and succeeded handily, growing as much as 2,800% in market cap until only three years ago, around the time that royalty-based digital gaming began to overtake the brick and mortar retail gaming market. Majesco suffered enormously as the market shifted, not having adapted to the new conditions fast enough. Its market cap has plummeted from $350 million in 2011 to just over $10 million today.
But the talent and capital are still there, and Majesco is now finally making the shift to the digital download market it needs to be in.
The changes at the company since last year have been enormous. Beginning with new leadership, Majesco named Barry Honig its new chief executive officer in October. Honig is an activist private investor with a long history of building companies from the ground up. In 2006 he cofounded digital advertising platform Interclick, which was sold to Yahoo! Inc. (NASDAQ:YHOO) for $270 million by 2011. He is also an active investment partner with biotech legend Dr. Phillip Frost, CEO of Opko Health Inc. (NASDAQ:OPK) and former CEO of generics giant Teva Pharmaceuticals Industries Ltd. (NASDAQ:TEVA).
Honig has certainly taken an activist stance in his new role at the head of Majesco, having increased insider ownership from 6% to 40% year over year. The balance sheet has been cleaned and now total liabilities are only $1.9 million as of the end of January. Remarkably, 60% of Majesco’s entire market cap is its cash holdings, with $6.65 million currently. Administrative expenses have plummeted by 50% year over year. As an added measure for shareholders, he orchestrated a special dividend of $0.33 a share back in January, about a 23% yield at the time.
Since he has taken over, the company has released two new award-winning games in January alone, so his direction is not strictly financial. And traders have taken his moves seriously. Stocks like Majesco are often the subject of short selling attacks by trend followers who expect a falling stock to keep falling, much like people chase high stocks higher on the bullish side. However, in March, short interest in Majesco shares has decreased 43%.
Fundamentally though, the move into the digital gaming space changes little about the company’s expertise and ultimate business structure. It simply shifts the outlet through which it distributes its games, and just in time, too. Digital gaming is set to overtake console gaming this year in revenue according to Fortune magazine, and though Majesco’s shift may have been a little late, with a $10 million market cap and over $6 million in cash, to say there is very little downside is an understatement.
With a clean slate, new leadership, new direction, but essentially the same business, the future for Majesco looks promising.