Gravity Ltd

This is a stock that I have owned for a while but simply never posted about because I had a small position and I didn’t really have much to say about the company. I think I first heard about GRVY from Jae Jun’s  Old School Value blog, and I followed it for a while before picking up a few shares last Spring. Since  then the stock has gone up 5-10% and pretty much stayed in that range. But at the beginning December I get into a year-end portfolio cleaning frame of mind, and all my too-small holdings are reviewed on an ‘up or out’ basis (kind of like being employed at a law or consulting firm). Last week the price of GRVY dipped unexpectedly back to the range where I bought my original shares last Spring, and I took the  opportunity to buy some more and make it a real position in my portfolio.  Now that the position is a little bigger perhaps it merits at least a mention.

Gravity Ltd (GRVY) is a Korean developer and operator of video games, specifically massively multiplayer online role-playing games (“MMORPG”). I have to admit I don’t really know what that is as I don’t do any video gaming, but I didn’t make the investment because of what the company does. This is one of what I consider my ‘statistical’ positions, i.e. stocks I come across that fall within certain statistical parameters. As a rule I’m willing buy a small position in companies with positive net current assets (current assets less all liabilities) without doing too much homework. If they have no debt and positive cash flow they are a shoo-in, unless there is something really wrong, like a pending lawsuit waiting to wipe out the company’s equity. Almost all net nets have something ugly about them (otherwise they wouldn’t be selling at these levels), so if you spend a lot of time analyzing them you find at least 20 reasons not to invest. I count on the historical performance of these type of stocks to help me here. Analysis time is better spent elsewhere. Gravity is a company that, when I made my purchases, was selling at 75% of net current assets and had no debt. Furthermore, cash makes up almost all those net current assets.

Why is the company selling at something less than liquidation value? It has been developing a sequel to its successful online game, Ragnarok, for the past 3 or 4 years. A couple of years ago it rolled out a beta version that didn’t cut it; the company had to go back to the drawing board and redesign the whole thing. You can imagine what this did to the stock! Since then, the release of RO2 (Ragnarok II, the sequel) has been delayed several times. In November it was delayed again, until the 2^nd quarter of 2011. I don’t think anybody expects RO2 to be released anytime soon, so if by chance they are able to roll it out in 2011, anytime in 2011, I think everyone will be flabbergasted and the stock might take off. In the meantime the company is cash flow positive with its other games and has $2.20 a share in cash. With patience this stock may be a double or triple. On the other hand if RO2 is never released cash on hand provides a reasonable cushion on the downside. I don’t expect the shares to do anything for the next six months but I would be happy to pick up some more if the price falls below $1.50.