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How One Investor Profited From LeapFrog And Nintendo Before Wall Street

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What does the Nintendo Wii, Nintendo's (OTC: NTDOY) most successful game console, have in common with LeapFrog's (NYSE: LF) LeapPad tablet for kids?

Both products represented an opportunity for investors to buy into these firms and enjoy massive gains.

"[In] 2011, the number-one selling Christmas toy was called the LeapPad," Chris Camillo, a self-directed investor and author of Laughing at Wall Street, told Benzinga. "LeapPad was like an iPad for kids made by LeapFrog. [That company] hadn't done anything very interesting in years. It was trading at about $3 a share. And here you have a small publicly traded company about to make the number-one-selling Christmas toy of the year. That doesn't happen very often."

Camillo said that analysts and "forward-thinking financial bloggers" eventually began to catch on.

Related: SunTrust Robinson Humphrey Downgrades LeapFrog on Bleak Holiday Season Outlook

"Well, some number of weeks prior to that, the story was getting traction with mommy bloggers -- people who had no affiliation to the financial world," Camillo revealed. "If you had the ability to capture that acceleration in chatter amongst mommy bloggers when the initial social heat went down with LeapPad, you would have had a multi-week period to arbitrage that information before Wall Street picked up on that information. So what I do is essentially arbitraging non-financial chatter and financial chatter."

This is not an easy thing to do. Camillo estimates that 99 percent of his ideas don't turn into trades because:

  • The information isn't meaningful.
  • The information has too high of a digestion rate among the investing public for that security.
  • There's incongruent data that can potentially undermine or trump the trade window Camillo is looking at for the dissemination of information he's trading on.

Unexpected Success

Nintendo is currently struggling to keep up with Sony and Microsoft, but there was a time when the Mario maker reigned supreme.

In fact, there have been many times when Nintendo dominated the video game industry.

One of those periods began in 2006 when Nintendo released its fifth game console.

"One of my larger investments of the past decade was Nintendo when Nintendo came out with the Wii," said Camillo. "At one point my entire portfolio -- 100 percent of it was invested in Nintendo ADRs."

Camillo attended the Electronic Entertainment Expo (the industry's biggest domestic event) before Wii, Xbox 360 and PlayStation 3 arrived at retail. He said that he spent a "tremendous amount of time" talking to GameStop managers and lived on gaming board every night.

Related: Wii U Sales Hurt By Retailer Confusion, Misinformation

"It was quite obvious to me that the Nintendo Wii was anything but a fad," Camillo assessed. "The press, however -- the financial press in particular -- had already started to move down the storyline with Xbox vs. PlayStation. Wii wasn't even on the radar. It took the press literally a year to finally come to terms with the fact that Wii was something other than a brief blip on the radar."

Meanwhile, Camillo said that it was "clear" to anyone who spoke to moms, kids and grandparents that Wii would be successful.

"Many people in the financial space, they would read articles and see what other people were saying about the Wii, [but] very few took the time and actually experienced the gaming platform, actually saw kids interact with it, actually saw grandparents interact with it," Camillo explained. "[Very few saw] a gaming platform that literally had a six-year-old playing a 60-year-old! I knew with a high level of conviction that Nintendo Wii was going to be a number-one gaming platform that first year."

Wii went on to become the number-one console of the generation, selling 100 million units worldwide in roughly seven years.

During the same period, Sony's PlayStation 3 sold 82.5 million units. In eight years, Xbox 360 sold 81.1 million units.

Camillo no longer invests in Nintendo, but he still values the benefits of social media. He is currently preparing to launch a hedge fund exclusively based on the analysis of social chatter.

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.

Posted-In: Chris Camillo E3 Electronic Entertainment ExpoLong Ideas News Tech Trading Ideas Interview Best of Benzinga

 

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