Archive for March 22, 2012

Hollywood Stocks: Our Brief Research On Four High Drama Movie Names

Rapid technological change has warped the film and home entertainment industries, and not all of the advancements have been positive for film producers. With the move toward a $1 a day or all you can stream platform, studio executives are up against a wall and a hard place — they need to protect their cash cow home entertainment market yet they also feel a need to be “high tech.”

Here are four stocks to research in the film industry that are affected by shifts in rental, sell through, and box office sales. Many of these stocks are trading at cheap enough valuations that if Ultra-Violet takes off some of these stocks are likely poised to be revalued at higher multiples in the future.

Lions Gate (LGF) — Lion’s Gate looks quite expensive to us at 63X earnings and we would avoid the stock based on valuation and also industry trends from the devaluation of the product through the relationships with SVOD, Netflix (NFLX), and Redbox. We think the race to the pricing and window bottom will eventually hurt film studio margins as production companies find it harder and harder to penetrate the lucrative home media market. We think the studios have “Killed the Golden Goose” by letting mom and pop retail die off almost completely. In order to drive margin, the movie industry was a lifestyle product and now it’s pretty much just a commodity industry with little in the way of product differentiation happening.

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An Army of Aunt Minnies Indeed!

An Angry Army of Aunt Minnies
John P. Hussman, Ph.D. All rights reserved and actively enforced. Reprint Policy

As of Friday, the S&P 500 was within 1% of its upper Bollinger band at virtually every horizon, including daily, weekly and monthly bands. The last time the S&P 500 reached a similar extreme was Friday April 29, 2011, when I titled the following Monday’s comment Extreme Conditions and Typical Outcomes . I observed when the market has previously been overbought to this extent, coupled with more general features of an “overvalued, overbought, overbullish, rising yields syndrome”, the average outcome has been particularly hostile:

“Examining this set of instances, it’s clear that overvalued, overbought, overbullish, rising-yields syndromes as extreme as we observe today are even more important for their extended implications than they are for market prospects over say, 3-6 months. Though there is a tendency toward abrupt market plunges, the initial market losses in 1972 and 2007 were recovered over a period of several months before second signal emerged, followed by a major market decline. Despite the variability in short-term outcomes, and even the tendency for the market to advance by several percent after the syndrome emerges, the overall implications are clearly negative on the basis of average return/risk outcomes.”

As it happened, April 29, 2011 turned out to mark the exact high of the S&P 500 for the year, and was followed by a steep intermediate market plunge. My impression is that despite the recent run of speculation the market has enjoyed – largely reflecting a reprieve in European debt concerns and what appears to be a drawing-forward of jobs into the first quarter due to unseasonably favorable weather – the extended implications of present market conditions remain decidedly negative.

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Pairs Trade: ISRG Long MAKO Short

Call me crazy, but when I analyze investments I’m usually looking for things like earnings cash flows and book value. Nowadays, most investors are simply looking for the hottest new product or concept when investing in stocks and valuation is simply an afterthought.

When looking at Intuitive Surgical (ISRG) we can see that the stock is richly valued at 43X earnings, but the company has such a strong history of meeting or exceeding analyst earnings estimates that paying such a high multiple is okay given ISRG’s fairly reliable 25% or so earnings growth rate. While I look for stocks trading at a PE ratio that is lower than the company’s growth rate, I admit that for a quality stock like ISRG paying 1.5X the growth rate is acceptable under certain circumstances. While ISRG is a high beta momentum stock, the momentum behind the company’s business fundamentals justifies the high price of the rallying stock. At 31X forward earnings and at a 25% growth rate, some growth investors would consider ISRG undervalued. Personally, I think ISRG is an okay speculative play provided investors use stop loss orders or buy put option protection to insure their portfolios against capital loss. In any event, we think investors can own ISRG provided they have an exit strategy and don’t hold the bag during market corrections like we saw last summer.

Mako Surgical (MAKO) on the other hand, looks to be overvalued


Time to Short Apple?

Shorts have been destroyed in Apple (AAPL) up to now. Could Apple’s vertical chart and meteoric rise provide a decent entry for a small short position in Apple? Tim Cook recently sold a large block of Apple at $545 a share. Of course, he still owns a boatload of stock after this small trade but it is a bad sign that the CEO is selling into a 100% six month rally. Steve Jobs is gone (R.I.P.) and with him goes one of the most economically enlightened minds of all time. Are enough visionaries left for Apple to be worth more than the GDP of most developing and many developed nations around the world? We think so, but the stellar growth will likely slow in the near future based on economies of scale and saturation.

While Apple is certainly worth a good deal of money, a $100 move in Apple stock represents more money changing hands than the entire market caps of GE (GE), Salesforce (CRM), and Netflix (NFLX) combined.

The valuation on Apple looks pretty reasonable but we are moving into the weak part of the year for their sales, and many consumers will likely skip a generation of phones and tablets if the recent move in gadgets was cyclical and not a permanent migration towards consumers buying a new device quarterly. In any event, my point is that Apple has moved very far, very fast and the stock could correct 10-20% without any major changes in growth rates or valuation would take place. The investment community, on the other hand, would be completely hopeless and desperate if Apple were to ever close below $600 let alone $500 again.

Because no one thinks it could happen, it just may happen and happen fast. Take a look at how overbought this stock is! Should Apple pullback to its 200 day moving average (and that happens to most stocks sooner or later), the stock would have to hit $400 a share.