To OTC Journal Members:
 

Two Trading Ideas in the Entertainment Sector

While we continue to believe there is a fairly high probability for a pull back in the market, we have come up with two ideas which we believe have blockbuster potential over the next two months. 

The market will be focused on economic data coming out later this week- GDP and unemployment statistics. A weak GDP number later this week could precipitate a pullback. 

However, despite the worst consumer confidence report in years early this week, the market has held its own, and NASDAQ seems to have support at the 1300 level. We may not get the pullback into the 1220 range we would love to see.

We have two extraordinary ideas in the entertainment sector for your review. Today's edition features a high flying video game company. Friday's edition will focus on a microcap which is about to set the entertainment world on fire. Be sure to check your inbox over the weekend.

The following idea focuses on a company that yesterday began shipping one of the hottest products ever introduced into the video game market. In addition, XML Global, one of our microcap focus companies, announced September quarterly results today. The results provide further evidence this company is poised to rebound. For your review:
 

Take2 Interactive Software (NASDAQ: TTWO)- Begins Shipping Red Hot Video Game

There are 22 million Sony PlayStation2s in use worldwide. One of the hottest games ever published for the PlayStation2 was Grand Theft Auto 3. Released about a year ago, Grand Theft Auto has sold nearly 8 million copies worldwide and generated nearly $350 million in revenues for publisher Take2 Interactive.

Take2 Interactive was rewarded with outstanding performance in its stock despite the tough market environment. Coming off a post 911 low of $6.30, the stock closed yesterday at $25.59 for 400% gain from the bottom.

Grand Theft Auto is a highly controversial game featuring gratuitous violence, wild car chases, and sexual encounters. In short, every adolescent's dream.

Vice City, the next generation game, was on the shelves for the first time in stores yesterday. All available copies nationwide sold out in minutes as addicted players waited in line hours before stores opened to get their hands on a copy.

The new game "Vice City," set in a city modeled on Miami, features voice tracks from some known Hollywood talent, including Ray Liotta, Burt Reynolds, Lee Majors and Dennis Hopper. Porn star Jenna Jameson, former football player Lawrence Taylor and 1980s TV icon Philip Michael Thomas also turn up. 

Vice City is much larger than its predecessor, with a 1,000-page script and 90 minutes of video interspersed throughout the game.

Consumers were required to put down on a $5 deposit in order to reserve a copy from the early shipments. According to a story by Reuter's, one of the largest consumer electronic retailers experienced a launch three times better than any video game in the company's entire history. Click Here to read the Reuter's story.

Retailers are expecting Vice City to be more successful than Grand Theft Auto. Talk to any addict of the game- they will tell you they plan to purchase a copy of Vice City, virtually guaranteeing sales of 8 million units. However, with the enriched environment and legacy of its predecessor, some analysts are anticipating sales of Vice City could jump into the 10 million unit range.

Despite the 400% appreciation since the post 911 low, this stock does not trade at a huge multiple to earnings. In fact, at current levels the valuation is quite reasonable.

Analysts anticipate the company will report $1.77 per share in earnings for their fiscal year which ends this week on the last day of October. Sales have been slowing over the past two quarters as sales of Grand Theft Auto slowed with the product's life cycle reaching maturity.

The company is expected to report $1 per share in earnings for the quarter which begins November 1st, and about $2 per share for fiscal 2003. Therefore, the stock is currently trading at a reasonable PE of 13 times next year's earnings, and 14.6 times this year's earnings. We believe the $2 EPS estimate  is low, and sales of Vice City will far exceed analysts estimates based on conversations with retailers and consumers. The stock could respond accordingly.

As you can see from the chart, the stock made a run from the late July lows of about $17 to an early October high of $31. This is a $14 move. Assuming the stock is entitled to give back 50% of its gains, a pullback to $24 would be the ideal entry point, which it hit two days ago.

We believe the stock could enjoy another $14 point move as sales of Vice City accelerate into the Holiday shopping season. This would give us an upside target of $38.

It is impossible to make any kind of realistic prediction for the stock price over the next several days. If the market pulls back at the end of the week, investors could have another shot at $24.

If you invest in this idea, you should do so with a two to three month time horizon. More aggressive investors might want to look at the Call Options. The December 22.5s are trading at about $5, and seem to represent the best value. The December 25s are trading at about $4, a much higher premium. 

As always, a stop loss is strongly recommended. If the stocks trades below $23 a trend reversal could be in place, and you might want to take your loss and move on. If your risk tolerance is lower, set your stop loss higher.

Detractors of the company point to a previous SEC investigation concerning the way they booked revenues in the past, and the violent and graphic nature of the games. However, based on price, earnings, and Vice City flying off the shelves, the market seems willing to reward investors. 
 

XML Global Technologies (OTC BB: XMLG) Reports Strong Growth in September Quarter

Today, just prior to the open of the market, XML Global released September quarterly results. Revenues met our expectations, but enhanced profit margins were outstanding and beyond expectations.

XML's sales have now increased for the last two consecutive quarters, and losses have dramatically decreased, establishing a positive trend for shareholders.

More importantly, gross margins on product sales improved from 42% of sales for this quarter in 2002, to 85% of sales in the September quarter. This proves the company has successfully evolved its business model from low margin consulting to much higher margin software sales.

Revenues were up 89% from the same period one year ago, and 25% from last quarter. 

From here, top line or revenue growth will become the most important factor in appreciation of the stock. Revenues for the quarter were about $320,000, which suggest there is tremendous upside in sales levels.

The long awaited XML revolution, which analysts were looking for two years ago, was derailed by the virtual halt of corporate IT spending. Sales are finally ramping up, and the company is beginning to experience enhanced demand.

Recently announced alliances with IBM and SunMicrosystems are opening doors for XML Global, and we believe sales will accelerate from here. Further announcements of new contract signings might give us a nice rebound in stock price.

We continue to be puzzled by the weak price of the stock. It was trading at this same level last May when the company was poised to go out of business, and recently the company has raised capital from sales of restricted stock at $.20, above the current market. We believe anything below $.20 is a steal. Look for XML Global to turn to corner to profitability in the first calendar quarter of 2003.

Here is the complete text of the press release for your review:
 

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MarketByte LLC has been paid the following fee by XML Global for a year of representation extending from February 2, 2001 to February 2, 2002: $100,000 cash, 60,000 shares of free trading stock, 60,000 shares of restricted stock which are now free trading, and 60,000 options exercisable at $2. The 60,000 shares of free trading stock have been contributed by a third party on behalf of the company. MarketByte's contract to represent the company expired February 2, 2002. The contract was renewed for another year, and XML Global has paid compensation of $20,000 in cash and one million shares of newly issued restricted common stock. Please review our policy on selling shares found in our Mission Statement on our home page. 

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