Robert Pattinson and Kristen Stewart in Twilight
Should you buy stock in a movie company this is about to release a motion picture that almost certainly will be a blockbuster hit? Tomorrow, March 23rd, Lions Gate Entertainment (LGF, $15.68) releases The Hunger Games, based on the hugely successful young adult novel by Suzanne Collins. There are more films planned in the trilogy. Also, LGF acquired Summit Entertainment in January, the company behind the popular Twilight Saga. This portfolio of movie franchises has not gone unnoticed by investors, as the stock of LGF is up some 87% since the beginning of the year. This release gives us an opportunity to look at how news--or hype--can affect stock prices, and the implications such headline-grabbing attention has for us as investors.
First, LGF is a relatively small outfit for a movie company, with a market capitalization of about $2 billion. This means that a blockbuster movie, or a series of them, is more likely to have a major impact on the stock price. Walt Disney (DIS, $43), in contrast, has a market cap of $77 billion, plus other assets such as ESPN, ABC Television, and their theme parks and resorts. Because of its sheer size, a major movie hit is not likely to move the needle very much for DIS. In fact, DIS has a major flop on their hands with the movie John Carter, which the company has said will lose them about $200 million, but that doesn't seem to be moving the stock price. The size factor comes into play with other companies and their new product launches. Proctor and Gamble (PG, $67) just came out with Tide Pods, a new version of their flagship laundry detergent that combines detergent, stain remover, and brightener in a ball that dissolves in the wash. A great product that will be a success for P&G, but the company is just too big for any one product to move the earnings and the stock price substantially. The bottom line is that The Hunger Games will be very important for LGF, and that is potentially both good news and not-so-good news for investors.
One of the basic investment principles that I like to emphasize here is that stock prices are based on expectations of the future. LGF's stock price over the last few months indicates that the expectations are running high for The Hunger Games, so it doesn't take a rocket scientist to figure out that a disappointment at the box office would crush the stock. But what if the movie is the blockbuster that everyone seems to anticipate? Well, that's the problem. If this success is already reflected in the stock price, then how much room is there for the movie to exceed expectations? Advance ticket sales are running strong, and the fact that many of them are for the initial midnight showing indicates a loyal--perhaps cult--fan base. Good news, you say? Not so fast, because everybody knows that. There is an old Wall Street maxim that says, Buy the rumor, sell the news. As that might have applied here, we would have, with remarkable 20/20 hindsight, bought LGF on the first stirrings that they had acquired the rights to a successful novel and then taken our profits as the hype of promotions and ticket sales crested with opening weekend. Following such general maxims is a bit like using your old great uncle's muscle spasms to predict the weather--you can't always rely on some old canard for investment guidance. It wouldn't surprise me at all, though, to see LGF's stock price falter a bit after a blockbuster opening.
The next logical question to ask about LGF is, What comes next? Movies are not Quarter Pounders with Cheese, and as the old show business saying goes, "You are only as good as your next big hit." I am typically not deterred from buying a stock just because it has already run up in price, but here it is important to recognize that for LGF stock to continue performing, the company will need to develop more successful movie properties. Then, of course, they have to bring those successes to the bottom line of earnings. Once we get past all of the hype surrounding the premier of The Hunger Games, I expect that the market will start focusing on the What Comes Next question.
LGF has not been a stock widely followed by Wall Street analysts, but it has been picking up some new coverage. Price targets I have seen on the stock range from $18 to $20, so the analysts who do follow the company still see some upside. So, I am not trying to dissuade you from investing in LGF, but that is a decision you have to make with your financial adviser after assessing your other risk exposure. The bigger picture (pardon the pun) here is that stock prices reflect expectations, and when those expectations are high, the only surprises are likely to be unpleasant ones. I read this week that tickets may have sold for almost every available seat at every showing for the opening weekend of The Hunger Games. There may be no disappointments when the headline numbers are evaluated Monday morning, but seating capacity alone would seem to limit the extent of any upside surprise. It is important to note, also, that LGF is about more than just this one movie franchise, although I have little doubt that the movie has been the one factor driving the stock's recent run. LGF also has a portfolio of television shows, including Nurse Jackie, Weeds, and Mad Men. The company recently was able to fend off a takeover attempt by fabled investor Carl Icahn (who reportedly sold many of his shares at $7), and has announced plans to pay down debt. If LGF can continue to develop content, especially in the popular young adult genre, they may have a long-term future as much more than just a one-trick pony with sequels. Take me to the movies.
News:
Life is short. Get busy.
Jim
Please post your questions to the Comments section of this blog, and I will answer them in upcoming posts.
Disclosure/Disclaimer: My family members and/or I own shares of DIS. Individual stocks are mentioned here for the sole purpose of illustrating investment concept, and nothing stated here should be construed as investment advice or the recommendation to buy or sell any security.
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