Dream a little dream of Gromit (DWA)

OK, so now I have a confession to make. I'm a big Wallace and Gromit fan from way back, I love their short films and I even loved Chicken Run and have a fondness for Aardman's other claymation pics as well.

So I might be a bit biased, and I haven't seen the movie yet. But I'm thinking that Dreamworks Animation (DWA -- get free real time quote from ADVFN) might do a bit better with this one than the analysts are predicting -- SG Cowen just came out and said they see no catalysts until Shrek 3 in 2007 so they see the stock standing for a while, but of course no one thought the first Shrek would be such a big hit until it came out, either. That's the beauty of the entertainment industry, sometimes a little pixie dust comes down and shakes the audience up and creates a hit from whence less was expected. I hold a few entertainment companies in my portfolio, and I last wrote about them in detail when I covered Marvel and Dreamworks a few months ago.

Everyone is predicting that Wallace and Gromit: Curse of the Were Rabbit will do OK here in the US, and do quite well overseas for a modest $150 million or so overall take. I'm thinking that Americans might cotton to this duo with far more gusto than is being predicted and vault it into a pre-holiday "hit for the whole family" -- humor, fun for adults and kids, and brilliant craftsmanship that's old-fashioned enough to hold your interest (not just more special effects, yawn), I'd say that's a good list of ingredients for a possible breakthrough.

Now, I might just be blowing smoke because I like this duo, and I haven't yet seen the film -- but it's getting great reviews and I expect the opening weekend to surprise everyone. For those of us invested in Dreamworks Animation who haven't had much to cheer about this summer, we might get to smile a little more in the next few weeks. Track the performance of the film at Box Office Mojo (and by the way, Mojo is pretty good at predicting grosses, but certainly not perfect, and they've got W&G pegged for $15 mil to lead the weekend -- I'll take the over).

Even if this is a pretty big hit as I think it might be, we may see a short-term pop for DWA but it's likely not going to turn things around for DWA in a hurry -- it probably won't become much of a franchise, since part of the magic of these characters is in the painstaking hand animation that has taken Nick Park et al about five years for this one film, and Dreamworks is struggling with some other strategic issues just like all the other entertainment content companies are (Lions Gate and Pixar, to name a couple -- and I do own and like Lions Gate). Beyond that, and perhaps most importantly for the bottom line, Dreamworks Animation is really just distributing this film, they don't own all international rights to the content and the characters the way they do with Shrek and the other films that they've developed themselves so they don't benefit as dramatically as they might for one of their own creations that achieves hit status.

I'm still on the fence about Dreamworks, waiting to see if Katzenberg and his management team can be as effective at managing Wall Street as they are at developing great creative ideas. I expect even the two films next year -- Over the Hedge with Bruce Willis and Gary Shandling, and Flushed Away (also Ardman, but CGI) with Hugh Jackman -- might do quite well and they both have good voice stars and creative new storylines, but there probably won't be much hype in them as they're not part of existing franchises. And there will be lots of competition, too, as Pixar's success combined with the Shrek blockbusters has made almost every studio reconsider big animation projects.

Until the hype of Shrek 3 and Puss in Boots begins pouring on in late 2006 I expect DWA will trade on actual results -- box office, earnings, and, perhaps most importantly given the Shrek 2 fiasco, DVD sales (Madagascar has become a surprisingly big hit -- how about those DVD's this Christmas? Something to watch carefully).

I can live with that, but other than a small possible short-term trade in call options to satisfy my urge to bet on the inventor and his brilliant canine, I'll not be buying or selling anytime soon.

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Wolf at the door ... let him out (WOLF)

This stock has been trying to get my attention for days, whining at the door, trying to get out and be free to go die in the woods alone.

I guess it's finally time I give Great Wolf (WOLF -- get free real time quote from ADVFN) his wish. Not a bad concept, seemingly an ambitious and aggressive growth plan, and a truly new kind of product ... all things I like. But they can't seem to get it right, so I've decided to move this tiny bit of cash on to bigger and better things.

I did post a little writeup on WOLF after their last earnings report in August, and I was disapointed but going to hold on for a year. Well, it turns out that was a lie -- I'm more disappointed now, and I'm not going to hold for even another day.

I opened my position in Great Wolf without understanding the company very well, which is usually a mistake -- especially with a recently IPO'd company that hasn't yet settled into the ways of the market. Thankfully, I never added to that position, but I did continue to learn more and more about the company. Frankly, I was on the fence until I saw their latest news.



Great Wolf announced on Tuesday that they will be forming a "joint venture" with a REIT to buy controllling interests in two of their waterparks, with a continuing agreement for WOLF to manage those parks.

Now, this might be a brilliant management move -- certainly hotel chains have been doing this for years, Marriott would much rather make money managing hotels than have to have all their money sunk into the real estate and building ownership. But this smells funny to me for a new, small company like Great Wolf, and it's enough to turn the tide and get me out of the stock -- even though it had shrunk to such a small position that, frankly, paying the commission actually made a dent.

What are the positives for Great Wolf in this deal? The only real plus I see is cash -- they get to pull some of the money they had sunk into these properties out and use it for expansion, and they might be developing a relationship with this CNL REIT to help fund other parks.

The negatives? The main one is that they lose control of their park in the heart of the indoor water park world, and of two of their parks in their proven heartland, the midwest, in order to fund expansion into the rest of the country, where their brand is so far insignificant and the concept has yet to be proven. That means bigger risk.



In addition, this has the scent of desperation to it -- WOLF has had a very rough time in it's first year as a public company, they have not yet shown that they really "get" how to communicate with investors and how to be open, honest and clear in their communications. I certainly don't think they've done anything unethical, but they've made lots of mistakes, especially in providing guidance and using the time-worn weather and holiday excuses for earnings misses.

But really, it looks like those of us who bought in -- and there were probably a bunch, it turns out that this was recommended by a Fool newsletter not long before I bought in, though I wasn't a subscriber at the time -- really overestimated the ability of this company to stand out from the pack and grow.

In the end, what kills WOLF as an interesting investment for me is the fact that they can't seem to compete effectively in areas where there are multiple waterparks, and so they're expanding to areas where indoor waterparks are unknown -- but expanding from a position of weakness. I would be much more comfortable if they were selling an interest in dominant properties or were clearly the best performer in their core areas, but that really doesn't seem to be the case. That calls into question their ability to be a leader long-term, because there's not much to keep the big entertainment companies from opening their own indoor waterparks if the concept does indeed get proven nationwide -- no one is going to be afraid to enter the WOLF's territory if Great Wolf has already shown it has trouble defending it's position.

So, chalk this one up in the loss column ... and start looking for where to put that money. Is it something I already own that looks promising today (and with the bloodbath in my portfolio the last two days, there are a few attractively priced candidates), or is it something new? I'll let you know when I figure it out, and if you've got ideas I'd love to hear them.

Oh, and let's close with the bitter details -- I bought Great Wolf on May 3 at $20.85. Sold today at $9.46. Ouch. At least I won't have to see that red line in my portfolio anymore.

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Pizza burning? Get Middleby! (MIDD)

I've written a little bit about Middleby (MIDD) in the past -- this growing and extremely well-managed commercial oven maker is doing everything right, it seems, and their recent earnings and price advances have certainly corroborated that statement.

My position in Middleby was built in the winter and early spring of this year over a couple purchases, with a cost basis of about $47.75. It's certainly not the same bargain today near $70, but it still meets at least one of the criteria of a value-priced growth stock: The analysts are still just discovering Middleby, but with the estimates now in the PEG ratio today still stands at just under 1, a value in anyone's book. The current PE is a little steep at 25, but it's hard to argue with management's track record and I think the analysts are likely to be trailing behind the actual growth of earnings in the next few years.

I haven't bought any recently, but MIDD came to mind today because I just read an interesting little updateover at the Fool on growth in pizza sales overseas and the booming times the big pizza franchisers are experiencing in China and other asian markets. They didn't talk about Middleby, but gave some interesting data on the impact on the big pizza chains themselves.

One thing I don't want to do is buy a pizza chain -- Yum Brands and their Pizza Hut brand notwithstanding, I don't see good reasons why one brand or another should become critical enough and longstanding enough to make a difference in asia, and I don't care to bet on any guesses in that area. Too many pizza chains have disappointed investors, and I'm not that interested in giving them another chance.

But growth in pizza restaurants worldwide?



That seems a much safer bet, and the winner of that bet is definitely Middleby -- the best and most efficient (and patented) ovens, specialization in this important niche, and a long list of relationships with some of the bigger companies that are expanding worldwide in addition to a great sales and service network.

Even if we're only thinking that US restaurants will continue to grow and crave efficiency (energy efficiency is a big deal for ovens, especially with energy costs climbing, and Middleby has some great, efficient products), MIDD is a solid bet for long term performance. But if we really believe this trend toward eating out and chain restaurants and, indeed, pizza, is going to continue to expand internationally, then Middleby is much more than just a solid bet.

Either way, I love management and I love the positioning of the company and the product -- and it's not particularly expensive even now, after all this share price expansion during 2005. I might consider adding to my position if we get a dip during the next few months with earnings, something to keep an eye out for.

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Buy 'em while they're down -- Shanda (SNDA)

**update** In case you needed a reminder, my purchase of a stock is generally an immediate contrary indicator -- I still think I got Shanda at a bargain for a long-term hold, but of course it began plummeting again just after I bought this position, and the price looks even better now, a day and a half later. That's the downside of being a long-term holder but an obsessive daily market and portfolio watcher, you are constantly reminded of the bargains you could have had and of the fact that your short-term prediction capabilities are virtually nil. Same thing has happened with almost all of my recent purchases, though most of them have already recovered to put at least the tops of their heads above the waterline. I repeat the mantra: long term, long term, long term.**

Just bought more Shanda Interactive Entertainment today, this stock fell out of it's nice little year-long trading range of $32-40 at the end of the summer and is now languishing at what appear to me to be true bargain levels.

Bought Shanda (SNDA) October 4, 2005 at $28.10.

I've written about Shanda at some length before, but it's been a while. My first purchase was near $32, so I've seen some highs and lows and also have a small position in Jan 2006 call options that will need a big boost to become a moneymaker for me.

At this point, I'm having a hard time understanding why Shanda has fallen so far ...



sure, they are in a very volatile industry in a very volatile and less-than-transparent economy, but still, we should not be able to buy this kind of growth and potential at these prices.

And, for me personally, this is a step away from a sector I was focusing too much on -- I've been in danger of falling into a biotech glut in my portfolio as that's where most of my recent purchases have been -- you can see that many of the recent posts have focused on that area, not least because it's performing like gangbusters right now.

Shanda, for those who haven't heard of them or read the full writeup, is a Chinese entertainment company that is the leader (still, though barely) in online gaming in China. Online gaming in China, including both interactive multiplayer games and casual games, is a huge business for a lot of reasons -- it's cheap, there are very few entertainment options in the extremely congested Chinese cities but internet cafes are inexpensive and readily available, and there are a lot of young people in China without siblings or work or other social outlets.

Shanda has been a leader in this industry since it began a few years back, both in-licensing foreign games and developing their own popular platforms, and while they are not the hot item in gaming right now (that title belongs to Netease after their surprisingly great year so far, or to the import game World of Warcraft hosted by NCTY) , they are still a dominant player in the industry.

So why buy now, when pessimism reigns? Well, that in itself can sometimes be a good reason,


but there are other solid reasons to buy as well.

First of all, the recent pessimism and the rush of hot money to NTES and other companies means that Shanda no longer must be bought at a premium because it's a hot name. Their forward PE right now is very close to the market average and their PEG remains well below 1, which should be shocking for a company that is growing at this rate and has a good position in an exploding market.

Second, analysts are poormouthing SNDA for the near term because there have been some delays with their upcoming new games and there is some uncertainty about the eventual success of Shanda's move to become a home-based portal of entertainment and move beyond just gaming. The short term estimates that Shanda will grow at "ONLY" 20% or so for the next year are scaring some folks off, but I think those estimates are very low and, whether they're right or not, hide the fact that there is some huge potential for future growth beyond the next quarter or two once their new games (especially Ragnarok and Dungeons and Dragons) and their home console are released. And that's not even considering the fact that they already have a huge addicted base of players of their existing games, which remain popular even if they're not at the top of the charts, and the margins delivered by the continuing performance of those games are remarkable -- Shanda's game players pre-pay, and each game, even those that aren't as popular, is quite "sticky" once a player has invested time into advancing and developing his characters.

Of course, Shanda's plans might not work -- but SNDA is already priced as if they're going to stagnate for a while, whereas Netease, which I also like, is priced as though its recent success with new games is going to continue and spur dramatic growth. I'm still holding Netease, but Shanda looks like a less risky bet for new money right now. Even if I'm wrong on the execution and SNDA continues to slip in the short term, the growth in the sector and in China in general is going to lift all boats, even the ones the analysts don't like as much.

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