Motley Fool: Activision has grown up but still a good play

Growth stocks are exciting, but before you jump into one, look for real, numerically relevant signs of sustainability.

Consider Activision Blizzard (Nasdaq: ATVI), maker of popular console games such as “Guitar Hero” and “Call of Duty,” and owner of “World of Warcraft.” It’s been a great business for years. So good, in fact, that it has more than tripled in value since Fool co-founder David Gardner recommended it in our “Motley Fool Stock Advisor” newsletter.

Activision Blizzard is a cyclical business that earns much of its cash from new releases. Therefore, studying revenue and net income isn’t likely to tell us much, since those are based in the past.

On the plus side, though, management has used the company’s generous cash flows wisely, buying back shares and instituting a dividend that was recently yielding 1.3 percent.

A glance at industry numbers reveals slowing revenue growth, suggesting that video games are a more mature business than we might like to think. But should we really be surprised? There are people in their 40s now who grew up playing video games.

With a forward price-to-earnings (P/E) ratio of 14, the stock seems reasonably priced, while the dividend adds a layer of protection against sustained losses. This may no longer be a growth story, but it’s still a good story.

Ask the Fool

Q: My portfolio is diversified across several mutual funds. I’d like to invest in individual stocks, too. Is there added value in that? – B.M., Hartford, Conn.

A: It’s good to be diversified, but many mutual funds are more diversified than necessary, often invested in several hundred different securities. (And many mutual funds are very similar to each other, offering more duplication than diversification.)

An advantage to putting a chunk of your money into individual stocks is that if a stock appreciates in value, it will make a significant difference in your portfolio. For example, if you park 5 percent of your moolah in Fingernail-on-Blackboard Car Alarm Co. (ticker: AIEEEE) and it doubles, your portfolio’s value will increase by 5 percent. If you instead own the stock through a mutual fund, where it represents a fraction of a percent of the fund’s value, its advance will be less perceptible.

Of course, when selecting your own stocks, you need to know what you’re doing. If you don’t, it’s smart to opt for funds managed by effective pros or index funds that automatically mirror the stock market’s performance. Learn more at www.fool.com/ how-to-invest and www.morningstar.com.

My dumbest moves have always been selling companies I strongly believed in and keeping the less successful ones. I bought shares of Amazon.com around $38 at the end of 2004 and sold them at $40 two years later, on the advice of an investment consultant who thought the company was too risky. Impressed by his credentials and conscious of my own ignorance, I ignored my inner conviction. I bought in again in 2008 at $75 – but sold half my shares a year later. That was a stupid move, as I could have sold many others instead.

If you believe in a company that has sound financials and a business you understand well, ignore the advice of pseudo experts and trust yourself. – L.D., online

The Fool responds: Good thing you hung onto some of your shares! Amazon, a “Motley Fool Stock Advisor” recommendation, has recently been trading above $140. Some people like to sell part of their stake in a company after they make a certain profit, such as earning back their initial investment. They then view the remaining shares as gravy.