Clearing out Small Positions (IMAX, LGF)

As time goes by I'm finding it harder to grasp -- and so I'm making a move to save a little bit of it. I've decided to clear some of the smaller positions out of my portfolio.

Essentially, any holding that makes up less than two percent of my portfolio has been put on notice -- if it's not something I'm actively looking to buy more shares of, I'm going to sell the few shares I do own.

To some extent this is a natural outcome of my hyper-diversified portfolio, and of my strategy of usually buying shares in fairly small clumps as I build a position. In most cases, I'll buy a few shares to open a position, then research the company more over the ensuing months and look for opportunities to fill out the position over time.

But sometimes, that first position I buy turns out to be either a mistake, or not as interesting as I thought it would be. In those cases, I'm usually very reluctant to sell these small positions because I want to wait for more information ... which means I get a huge number of small positions building up in my portfolio, all competing for my attention and demanding a certain amount of effort as I track the news and earnings information about these firms.

But life is growing more complicated and there are always interesting new purchase ideas in the back of my mind, so I'm going to focus on being a little quicker to make decisions about these companies that I've taken a small position in and then left to wither.

Two companies that I've actually bought and sold before meet this criteria today: They are small positions, each not much more than 1% of my portfolio, and I'm not interested in buying shares right now. So I'm selling Imax (IMAX) and Lionsgate (LGF).

I don't have strong negative feelings about either of these companies, but neither am I interested enough to buy more ... and there's no point in paying close attention to these in exchange for what is likely to be very limited upside (at least to me, since these are small positions).

Imax has been in a reasonably decent recovery over the last few months, though it has come down about 10% from the recent high near $5.50. I still think the shares are undervalued here, but I don't have enough conviction to buy more and make it worth my while. My primary concern is the company management, which has so far failed to meet reporting standards and mismanaged a "strategic partner" search process. It's quite possible that the big screen company will prosper -- they're certainly doing well with hit films so far this year -- but in order to really thrive they're going to have to expand their base significantly, which is likely to take quite a long time at this rate. They believed that they needed a partnership or a buyer who could push their growth, and I'm inclined to agree -- but with the lack of interest in theater companies right now, I don't know that they'll get it at a fair price. Even Cinemark (CNK), the big international cinema operator which came public just last month, has received a fairly tepid response in the market.

And Lionsgate is, though steadier and more profitable, also unlikely to make any big moves soon. While it's interesting to hold this one and watch to see which of their films are hits and which bomb, it's not interesting enough to make it worth my while. Carl Icahn is still holding shares in this one, though it doesn't appear that he has bought any in quite some time or made any activist overtures toward the company of late, so there's certainly ample reason to hold the shares here. My primary concern is that the shares are a little too expensive to buy, considering the growth rate they've shown over the past two years, and I simply no longer own enough shares to make it worth my while.

These decisions are very personal ones relating to my portfolio composition, so I wouldn't argue that anyone else should consider selling these companies -- I might look back and regret this, but for sanity's sake I need to focus my attention on my filling out positions that I feel more strongly positive about.

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Will Imax Really Make It? (IMAX)

So this continues the week of "so bad they're good" stories -- earlier, it was Chico's that investors finally thought had run out of bad news and begun the turnaround.

And today, I look at Imax, a hugely disappointing stock from my portfolio, and see that it has quietly crept back up to something approximating a respectable share price.

Now, the news is not THAT good -- they're still leagues away from the prices we saw a year ago, or even last August, before they announced that the four rumoured suitors for the compony weren't interested after all ... or at least, not interested at their price (and all the analysts climbed over each other pressing the "sell" button.")

I wrote a fair amount about Imax at the end of last year, noting how I had misjudged the company and also that I believed a fair price had to be a fair tick above where it was then trading down at about $3.50, assuming that you didn't believe the company was headed toward bankruptcy.

Unfortunately, I didn't put my (additional) money where my mouth was at the time, since the earnings miss had forced a plunge in price from $5 to $3.50, and here four months later the shares are going for about $5 again.

And still, I think $5 is too cheap ... but I'm just letting my investment ride, I'm still nervous, primarily about management, and am certainly not putting any more money into this management team.

But the recovery from last fall has been fairly quiet -- the company effectively took itself off the market and said they would grow on their own, which means I expect we won't be trading on those buyout rumours anymore (though one never knows -- maybe the private equity guys will be back once they've bought everything they actually like).

And the news has been positive, but mild this quarter -- some new installations and orders, particularly overseas, and some buzz about the potential for their Hollywood flicks this year (The Spartan fight flick 300 had a surprisingly great opener on Imax, and Spiderman 3 and another Harry Potter are on the way. That will almost certainly be a nice step up from the series of flops they lucked into last year, including V for Vendetta and Poseidon).

But the biggest news so far came today -- big(ish) new deals with US theater chains, which haven't exactly been closing deals in bunches of late. Imax will now be opening five theaters with Dickinson in the Midwest, and one each in California, Florida and Oregon for Regal.

While the installation backlog even as of the terrible earnings release last November was decent, it's nice to see new deals, and especially nice to see that they expect at least three of those theaters to open this Spring. Imax still makes money mostly on the installations, so the more of those we see actually coming to completion the more will flow to the bottom line.

And it's a little bit of a network effect -- the bigger the installed base, the more competing chains need to show they can get their Imax on, too ... and we get into economies of scale, since Imax is still working from a pretty tiny installed base. The more theaters to distribute to, the cheaper it is to remaster, market and distribute their films. It doesn't take all that much to show good growth when you start out tiny.

The fates seem to be gathering -- the share price is low, contrarians can look at a slate full of sells and holds from the analysts and a pretty big short ratio, the box office should be great this year on the back of some blockbusters, the theater owners are showing a little confidence and placing orders for new systems again ... is anyone else waiting for the other shoe to drop?

disclosure: I do own shares of IMAX.

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Risky moves in 2006 -- my worst decisions

I haven't yet done the math on my whole portfolio, but I expect overall I puttered along somewhere near in line with the S&P in 2006 -- I'll update that here in the coming weeks to continue my full disclosure.

But I do know what some of the smartest and dumbest things I did with my money this year were. Or, to be more charitable, my best and worst decisions.

My worst investment decisions this year all related to the riskiest moves I made -- investing in OTC stocks and buying after hours, both things that I would probably be better off not getting involved with (but sometimes, I just can't resist).

I own three OTC stocks (and a couple pink sheet listings, though those are for big companies that happen to be based overseas and not actively traded here), but only one of them was purchased in 2005. I've owned SpaceDev (SPDV) and Cryo-Cell (CCEL) for well over a year now, and they are two of the worst performers in my portfolio, so they might qualify as big mistakes for 2005, but not 2006.

The worst timing this past year was my purchase of MMC Energy (MMCN) -- shares of which I bought in early December at $1.24, and could now buy for about 80 cents.

MMC Energy shares have been declining because of a big registration for insider selling, which generally wouldn't worry me that much in a brand new company (it doesn't bother me when venture capitalists and insiders want to get paid for their work) ... but in this case, it's a LOT of shares, and a company with a very small float, and those two facts combine to mean that the shares are likely to be under pressure for a while. Add that to the fact that MMC is not yet on the AMEX, an event they predicted to occur by the end of the year, and the steep decline is not that shocking, even in the absence of any bad news about the company's actual operations.

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Regardless, while I still think the rule to avoid penny stocks is generally a good one because of volatility like that experienced by all my OTC shares, I still have hope for all three of these companies -- SPDV and CCEL should be profitable in 2007 if things work moderately well for them, and MMC Energy is in a capital-intensive growth phase that I think has a solid chance of building a good company.

I also know, however, that all the money I put up for these companies is at risk and might all be lost -- that's the price you pay for investing in a tiny company with potential, and I'm willing to be quite patient as these stories play themselves out.

And my second worst investing decision last year was buying shares of a company that reported terrible news in the after hours session. I thought -- and this shows you how smart I am -- that the beating that Imax (IMAX) took following their announcement that they hadn't found a buyer was terribly overdone, so following the news I picked up some shares in the after hours session at about $6. It's never even gotten close to returning to that level since.

So what are the lessons for me?

When investing in OTC stocks that are notoriously hard to value, especially new ones, go in with your eyes wide open and the expectation that you might lose all your money. At this level, you're really investing in business plans and management and potential most of the time, all of which can be a bit ephemeral. I'll continue to wait on these stocks, and to keep them a tiny portion of my diversified portfolio.

And the second lesson, learned after making this mistake several times, is to never ever ever trade in the after hours or pre-open trading. For the few times when an informed investor can make money in these sessions with some lucky timing, you pay with the many times that you had the wrong conviction which, given the time frame allowed for this kind of trading, is almost always going to be based as much on emotion as anything else.

I've learned lots of other things from my mistakes and victories in the past year, but these two risky areas stand out in terms of what they've cost. I'll share some of the better decisions I made, and what I might have learned from those, in the days to come.

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I Dramatically Misjudged Imax (IMAX)

So, is a company ever too cheap to sell? That's a very apt question for Imax (IMAX) shareholders today. The large-format theater company reported a dismal quarter, bringing shares down dramatically once again (by about 20% this morning).

I had thought that almost any possible bad news was baked into this stock -- clearly I was wrong, as a .30 cent per share loss is a far, far cry from the .05 profit the analysts were predicting. I was shocked that they didn't install a single theater system in the quarter, which was the primary reason for the shortfall (though they did sign some additional deals, particularly overseas, and they continue to have a solid order backlog that will keep them busy with installations at least until the beginning of 2008).

They blame "slippages" in permitting and construction for these delays, but "expect" to install 5-8 systems in the fourth quarter of this year -- which ought to bring revenues back up to where they were in the third quarter of last year, when they installed 6 systems and recognized about $20 million in systems revenue (as opposed to this quarter, when they installed nothing and recognized about $7 million). The ongoing revenue was about the same year over year, even though the film slate was weak with the disappointing Ant Bully not doing much to drive revenue.

I bought these IMAX shares after they announced that they hadn't found a buyer for the company a few months ago -- I fully expected them to step back and accept a somewhat lower price for the company, but one that was higher than the then-bargain price of around $6 (I've since sold the shares that I held before that announcement). I was certainly wrong about that, at least for now -- I don't know whether it's because the company is "damaged goods" with their SEC investigation or just because of the fragility of the movie theater business, but no one is stepping up to buy the company at the moment.

They have authorized their investment bankers to look for bidders at lower valuations, but that reeks of desperation -- the shares are now $8-10 lower than IMAX was hoping to get in a deal, and it seems that any interested buyers can simply bide their time and wait, like vultures circling a lame beast in the desert.

It is probably not really worth it for me to sell my IMAX shares at the moment, since as long as they remain a going concern and don't collapse into bankruptcy the share price is likely to recover at some point as installations pick up, and as the Spider Man 3 and Harry Potter movies mean film revenue is likely to be signficantly improved in 2007 ... but the temptation to sell just so I don't have to look at this red line in my portfolio every day is very hard to resist. They also face a significant risk in changing over to digital projection in 2008, as they plan, which could either really spur sales or drown them in additional development costs.

I don't have much faith in the company at this point, and their high debt levels and very weak reputation on Wall Street make the shares riskier than ever -- but it does seem to me that they ought to be able to hit sales of at least $120 million next year with their order backlog, and I don't see a lot of justification for the company to trade at much less than 1X their sales as long as those installations remain profitable. At those prices, at least a private equity buyer ought to be interested -- although it gives one pause that Imax hasn't gotten a decent buyout price at a time when the markets are awash in cash that's looking for a home.

My reluctance to sell is probably a personal weakness, I feel to some extent as though I'm standing on the deck of the Titanic but focusing more on the abundance of ice cubes -- and I don't want to give anyone the impression that I'd advocate buying shares here.

disclosure: I do, regrettably, own a small (and shrinking) IMAX position.

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Selling some Imax (IMAX)

Everyone knows what's wrong with IMAX today -- they offered the company up for sale, they didn't get a buyer at the price they wanted ($12-14), their accounting is in some dispute with the SEC, and, as a result of those first two, the class action lawyers are circling like sharks.

Which just goes to show you how bad a company can perform even when their business is on track and their profits are growing. And why I'm selling some shares today as part of my overall margin reduction initiative.

I don't like selling IMAX -- I'm still holding the shares that I purchased for a retirement account at $6.20 following the disappointing no-buyout news. I thought those shares were a bargain then, and I still think that's well below a fair price for the company.

But given the confusion about their accounting and the risk that their accounting problem will actually develop into something signficant (at this point, it's just a question of recognizing revenue during construction of their theaters, which is a timing issue that I don't much care about), I can't justify borrowing money to hold the shares in my margin account any longer. The fact that the CFO resigned adds a little more urgency to the situation, and may explain why the shares remain in freefall, but I think it's as likely that he was a sacrificial lamb or that he made a simple mistake as that there was any real chicanery going on.

So I'm selling a bit less than half of my overall IMAX holdings, and clearing out all of the shares that I held on margin. This sale brings a loss, of course, so at least it will help me to write off some of the profits I'm taking in other positions.

The Imax shares I'm selling today were purchased at an average price of $7.30, and sold this morning at $4.99 for more than a 30% loss.

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After Hours IMAX Buy (IMAX)

Well, I couldn't resist. I might be grasping for a falling knife, which doesn't often work out that well for me, but I think the reaction to Imax's news this evening was wildly overdone, and I ended up buying a few more shares as the price tumbled by about 35%.

When I saw that Imax had not come to an agreement to be acquired or form a partnership with one of the four bidders who were interested, I certainly expected the shares to lose ground. But in my opinion, the possible deals were so nebulous and the performance of Imax films in the first quarter so weak that there really wasn't much of an acquisition premium built into the shares.

After all, the shares were well above $9, and they were doing pretty well on raised guidance for FY 2005, when they announced they were exploring "strategic alternatives" back in early March -- certainly, everyone who invested in this company since then has been focused on the possible takeover, and on a buyout premium that would drive the price to the neighborhood of $12 to $14.

And if the price had hit $14 before this announcement, the 30%+ decline would make a lot more sense to me.

But it didn't -- the premium never really got priced in, so I guess you can say the market was, very rightly, cautious that a deal would happen at that price ... or at all.

So how does Imax look without being an immediate takeover target (and it still may be in due course -- they are still exploring their options)?

Well, to begin with, they did beat the earnings estimates for this quarter, and they beat on the revenue number as well ... so this reaction to the announcement is clearly just a reaction to the buyout news, the company's operations seem to be fine as far as I can tell.

Analysts are estimating an average of 42 cents in earnings this year and 62 cents next year -- and given the good backlog of installations, the constant announcements of new theater deals, especially overseas, and the great slate of films for next year (Spiderman 3 and the next Harry Potter), I have no reason to question that estimate. Superman Returns has been big for them so far this Summer, and Imax is certainly starting to get more of a push for these simultaneously released blockbusters as studios see the gravy Imax showings can pour onto their box office results.

So I put in a limit order at $6.20 after hours, fully believing that this price, more than ten percent below the low hit in January, wouldn't deliver the shares to me. But I thought it was worth a shot.

And now, surprise, I'm the proud owner of a few more Imax shares. I've said before that this is not my favorite company in the portfolio, and that I would have given up my shares at $13 without a fight. That's still true.

But buying shares of this company, which I believe is growing well and has further growth prospects, at a forward PE of 10, is too good to pass up.

It might be that I'm just being stubborn.

This is certainly a small gamble, and I haven't put a ton of money into it. It's possible that the company will truly suffer in the short term without a deep-pocketed partner or a buyout -- but in my opinion, the risk is that they won't grow as fast as their market will bear if financing is weak, not that they will actually have operational difficulties in continuing to grow at the moderate pace they've kept up so far.

Wall Street is having a hard time believing that Imax is for real, and no one was willing to step up to the plate and pay enough cash for the company to make management recommend a buyout -- so it could be that the company really isn't worth as much as I think it is. But it could also be that the arbitrage rats fleeing the sinking ship are just being short-sighted ... only time will tell.

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Imax Immolated (IMAX)

Now I kind of wish that Imax hadn't told us they were shopping the company around.

In what was clearly a huge shock to the market, Imax announced today that none of the bidders were willing to pay a reasonable price to acquire the company (no mention of what that reasonable price would have been).

So the stock swooned by something like 30% after hours -- and I may even put in a very lowball bid for some shares in after hours trading if this keeps up.

Because while the corporate restructuring news was pretty bad ... the operational news was quite good. Despite a few stinker films earlier this year, Superman Returns was a big hit and they continue to sell plenty of theater installations both here and overseas. They beat on both earnings and revenue.

And at first glance, picking up these shares in the $6 range, which they haven't seen since 2004 (they were in the $8-10 range well before any takeovers were rumored), might be a possibility. At that price, it starts to look like a pretty nice little value-priced grower to me again -- especially when you take into account what might be a couple of significant Imax blockbusters next year in Spiderman 3 and Harry Potter 5 (or is it 4? I lose track).

We'll see ... there clearly were a lot of folks counting on a $13+ buyout bid, and from the looks of the after hours trading they are all desperately trying to sell. I would have been happy to sell at those levels, too, but I have no interest in selling at $6-7. Considering that this is a profitable company that's growing reasonably well on its own, albeit not as nicely as they would if they partnered with some deep pockets, a 30% haircut seems to me to be a significant overreaction.

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Imax Rumors Fleshed Out (IMAX)

It looks like some news might finally be imminent for Imax and their potential takeover/partnership arrangements. Imax's management offered up the company for strategic partnerships months ago, and there has been a several round bidding process taking place behind closed doors to decide what will happen.

Today, news came out in the Globe and Mail (the biggest Canadian newspaper -- Imax is a Canadian company) that the process is possibly nearing completion and that four interested parties are still in the running.

The article, Sony Among Four Chasing Imax, quotes analysts and investment bankers, as the company itself has been mum for months. It really couldn't come at a better time with Superman Returns doing great business at Imax theaters around the world, The Ant Bully on deck to make an impact as a 3D animated Imax, and the news that Spiderman III will be a simultaneous Imax release next summer.

Essentially this will come down to whether Imax prefers a private equity buyout that might keep management in place, or a merger/acquisition or very deep partnership with a studio that would give them less independence but a stronger industry presence. The Globe asserts that there are two private equity funds and two companies involved right now, which ought to be enough to get some good terms.

I'm not committed to Imax in the long term -- I think they represent great potential for the theater business and are undervalued based on that potential, but I'd be happy to sell out at a nice premium. The rumor mill has a buyout at between $600-700 million, which would be a nice spike over their current enterprise value of just over $530 million (market cap of $430+ million and about $100 million in net debt). That translates to at least $12 a share, possibly as much as $14 or 15 ... and analysts now believe that we're entering the final innings, so we might see some real news on this by the time they release earnings in about two weeks.

The price today reflects that newspaper article, with a nice 8% bump, but the market is clearly still discounting this -- if a deal happens, the pop will be very quick and significant, if it doesn't happen and no news comes from the company in August we're probably back to $9.

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Not Entertaining Enough (DWA, MVL, IMAX, LGF)

I sold my small position in Dreamworks Animation (DWA) this morning, offloading the shares at $23.25 for a loss of about 35% (average purchase price was about $35, I unfortunately bought shares over a year ago, before and during the Shrek 2 DVD fiasco.

This represents a significant change of heart from my last note about DWA, back in December -- at that time I thought 2006 would be a buying opportunity as we await 2007's Shrek the Third and Jerry Seinfeld's Bee Story film, then Jack Black's Kung Fu Panda and maybe a Puss-in-Boots movie in 2008.

That's still entirely possible, and several analysts see it that way. But after taking a closer look at my portfolio I've decided that I'm uncomfortable with the size and scope of my basket of entertainment stocks. I also own shares in Imax (IMAX) , Lionsgate (LGF) , and Marvel Entertainment (MVL) and I've decided both that I've got too much hit-reliance and entertainment in my portfolio, and that I prefer the other three over Dreamworks. DWA was also the smallest position in this group, so this move also helps with my effort to consolidate and focus more of my time and energy on my larger holdings.

But the size of the position wasn't enough of a reason to sell it -- each of those three entertainment companies has a more compelling upside, I think, than does Dreamworks, though it's also possible that they are also higher risk.

I'm a little concerned about Imax given their very poor luck at choosing their first two films this year (V for Vendetta and Poseidon were tough on them), but I see potential catalysts in the Superman movie and, more importantly, in their possible acquisition or reinvigoration in partnership with someone. That's a large part of the reason I prefer holding IMAX to DWA -- I'm waiting to see what happens as the company "explores its options" with regard to a possible tighter partnership with a big studio or an outright sale of the operation.

Lionsgate, likewise, had a rough Spring -- its highest profile film was the Starbucks-partnered Akeelah and the Bee, which never was able to capitalize on the feel-good word-of-mouth marketing from Starbucks and break through into the public consciousness. Still, Lionsgate has a few things going for them that Dreamworks does not -- they have a huge film library that makes them a very enticing acquisition target if all else fails; they have several franchises that are very profitable (Saw, Tyler Perry); and they have a corporate commitment to profitability, not hitmaking -- they're willing to make or release anything for film or TV as long as they think they can make it profitable, they don't rely on "winning the weekend" for each of their releases (though their low-cost horror and "urban" films have occasionally done just that). This seems a safer bet, and more compelling opportunities for profit, than a hit-reliant animation studio that has so far had trouble even turning hits into profit (which makes me quite nervous about the impact a serious flop would have on DWA).

And finally Marvel ... as a kid who grew up reading Spiderman and X-Men comics I may be simply letting nostalgia firm up MVL's place in my portfolio -- but I don't think so. What I like about Marvel at this point is just the same thing that some, including Jim Cramer, don't like -- they're adding more risk and greater potential reward to their business plan.

Marvel, like Dreamworks, is hit-driven. It was Avi Arad's work to build Hollywood franchises for X-Men and Spiderman that allowed the company to recover and attain profitability over the past several years, and it will be successful films and similar entertainment properties that drive the bus forward. I very much like that Marvel has chosen to continue with their licensed film production -- which will build on the monster hit X-Men 3 to bring us Spiderman 3 next year, and a Wolverine film probably by 2008 -- but to also build a parallel production capacity to bring more Marvel heroes to the silver screen.

This will mean more risk, as Marvel has entered into a $500 million financing agreement to put these films together starting in 2008, but it will also mean much more reward if they can continue building hits based on more of their characters -- instead of a few percentage points of the gross like they get with their older deals for X-Men and Spidey, they'll be pocketing all the profit after paying off debt and covering Paramount's distribution fees. Of course, that means that if the films flop or fail to pay off the debt nut, they'll be in trouble -- but the company will survive, thanks to what I think is very clever non-recourse financing that puts up only the characters themselves as collateral. A flop of a film will mean, if Marvel can't pay the bank, that they lose the right to make any more movies with that character -- that seems fair to me.

The two things that make me a little nervous about Marvel are their penchant for adding debt right now for no good reason (they're borrowing money to buy back shares, which seems foolish to me -- much less sensible than borrowing money to make movies), and the changing nature of their relationship with Avi Arad. Avi was the one who brought Marvel to Hollywood and made it work, but now he's moved on to create his own independent production company that will subcontract to product Marvel's films. This is fine if it just means he has more time to focus on the films, but I'm not crazy about adding another middle man company that will siphon off a bit more profit from Marvel. Avi has done great things for Marvel, but he's also the one who put together the laughable Nick Fury film with David Hasselhof a number of years ago, so he's not infallible.

So four stocks, among which Marvel is the only one I'm holding at a paper profit right now, and I'm offloading one. It should be an interesting couple of years (or months, even) for some of these companies as hits emerge and recede, takeovers are rumored or offered for Imax and Lionsgate, the DVD format war heats up, and online and cable film offerings become more and more flexible and, hopefully, create new revenue streams for Marvel and Lionsgate.

Dreamworks Animation may well have a very good 2007 at the box office, but I'm not convinced that they'll profit from it or that they'll be able to stand out in an increasingly competitive animation landscape. I could very well be wrong, but right now I'm more confident in the prospects for my other entertainment holdings.

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Movie Investing Blahs (IMAX, LGF, MVL, DWA)

The movie industry investments in my portfolio have been a bit disappointing of late ... weak box office and dragging financial results from Lionsgate and Imax are causing a small sector of red in my portfolio.

I'm standing by these companies at the moment, but they're not making me stand up and cheer just yet.

I was clearly a little too optimistic about Lionsgate Entertainment (LGF) and their push to copromote Akeelah and the Bee with Starbucks. It looks like even the might of Starbucks couldn't pull this one anywhere near the top of the box office standings, and I can vouch for the fact that they definitely tried -- every Starbucks I've seen in the last month from DC to California has been plastered with spelling bee paraphernalia and Akeelah soundtrack CDs.

It' s still possible that this will build into a word-of-mouth hit as it hits more theaters around the country, but with the marketing push from Starbucks I definitely expected a bigger splash ... and with the notorious impaticience of theater owners I don't imagine Akeelah will keep its theater slots for long if performance doesn't turn around quick.

Now that's definitely not going to sink Lionsgate -- they can have a few stinkers every year and still do well, and I think Saw III and the next Tyler Perry movie will be successful, along with some films that will come out of the woodwork to make money. Lionsgate isn't built on megablockbusters, as I've written before, and in the long run I think this dip on weak Akeelah news might be another buying opportunity.

But it certainly isn't good news if Akeelah really stinks up the joint -- not for Lionsgate, and perhaps even more so not for the Starbucks entertainment division, which is trying to convince Hollywood that they can help build a hit. I'm guessing nobody in Tinseltown is that impressed yet, though that probably won't turn them off their double-skinny-soy-vanilla-mocha-half-caff-lattes.

Imax (IMAX) is another story ... and another one that's a little disappointing. The large format film company has been slowly trending down since they got a pop from announcing that they were looking for partners or buyers to help ramp up growth.

No news on those partners yet, though several folks are reporting that they've got some preliminary offers and are working with some of the more promising ones ... no real timeline I've seen yet.

Performance was a little weak for the first big Hollywood release on Imax this year -- V for Vendetta, which I don't think anyone liked much in the regular theaters, either. Hopefully Poseidon will be a bigger hit next week, but it's a guessing game which of the popcorn movies Imax partners with will actually achieve blockbuster results. Their non-Hollywood film, Deep Sea 3D, apparently did very well, so the core Imax business appears fine.

The Fool had a nice article out on the potential for Imax in moving to digital, so it's nice to see that they're not being left behind on that trend ... and might even make up some ground, since they believe their operators can make a digital transition pay off much faster than conventional theaters can. They also have a good backlog of installations, including many that are underway now and should hit the earnings book soon.

In the short run, though, until we hear about what the company's going to do -- sell themselves, get a well-heeled partner, etc. -- the stock is more likely to trend down than up. I expect they're probably anxious to get some answers, so I think we're likely to hear something in the next month or two and am willing to be patient. But until that happens, Imax is probably just going to drift, regardless of earnings and movie performance ... even Superman, who will be hitting Imax this summer in 3D, may have to wait in line behind the private equity firms and Hollywood titans if he wants to impact IMAX's stock price.

And as for Dreamworks Animation (DWA) and Marvel (MVL), to close out this note on my movie industry investments ... well, in the short term we're going to have to see if people line up for Over the Hedge and XMen 3, respectively, but both of these companies have much stronger film slates in 2007 than 2006 -- so any opening weekend weakness might bring more buying opportunities there, as well.

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Analyst Rollercoaster (IMAX)

I just noticed that the ridiculously active analyst for IMAX over at SunTrust has made yet another move. Thought it might be interesting to look at what his moves have been since they started covering this stock back in September -- roughly six months of coverage, during which the stock has not moved particularly dramatically compared to its past performance, and the only really big news in that time (in my opinion) was the news out today that they may be selling the company.

• SunTrust initiated coverage with a Buy on IMAX on September 14, a day when the price opened at $9.47
• Then they downgraded IMAX to Neutral on December 19, when it opened at $8.29 (and quickly dropped thanks to the downgrade)
• And re-upgraded it again to Buy a month later on January 26, when the price was $7.79
• And today, with the shares at about $10 (I don't know when the downgrade went out, but that seems a fair price), they have again downgraded them to Neutral according to a Marketwatch story.

What an exhausting round trip! I find it remarkable that an analyst who is purportedly issuing research reports that will allow people to invest for at least some semblance of the long term (not day traders, at least), is urging such active trading (since almost no analyst ever says "sell", you'd have to assume that "neutral" means "get out now!").

It is true that if you were on the ball and trading in and out on these recommendations you might have made a little money before taxes, depending on the size of your trades and your commissions -- you would have had to be lucky, though, and caught a good price on December 19 because the downgrade drove a dip and the shares closed at $7.61. If you bought and sold at average prices on the days of those recommendations, you could have easily lost money even before commissions.

During the time he went in, out, in, then back out again, no other analyst (there seem to be six active ones in IMAX coverage) has made a change to his IMAX call. ... which is reasonable, since during that time the underlying business maintained a pretty steady and uneventful (for them) growth trajectory.

I think what I'm most surprised by is an analyst having such an itchy trigger finger. That can't be good for anyone. If you take out the two swings in the middle, when a very quick trader could have made some money if he was lucky and right, we've got an initiated coverage at a buy, then a downgrade six months later after a 5% increase in price brought the shares too close to his price target. Sheesh -- that definitely doesn't seem worth it. If you think the shares of a very small and volatile stock will advance less than 10%, why on earth did you have a buy on it in the first place?

I don't mean to pick on the analyst for SunTrust too much ... but next time I'm on the verge of being swayed by an analyst call, I think I'll look at those numbers again.

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Double Whammy for IMAX

Very nice release and reaction for Imax (IMAX -- click to register for free RT streaming quote) today. Not only did they beat their guidance (they were in line with analyst estimates), but they also announced that they're exploring "strategic alternatives" for merger, partnership or purchase by another company that can help them leverage their success.

The market hasn't been crazy about Imax and hasn't bought into the story that I believe, that they're reaching an inflection point where the growing global installed base and the increasing numbers of (and huge success of) Hollywood films on IMAX will feed on themselves, bring more theaters in, and provide a large ongoing revenue stream as IMAX begins to get a small cut of ticket sales.

But the market loves this news -- if there's one thing people on the Street love, it's a buyout. The shares spiked up this morning and are still up over 10% as I type this.

Now, I'm happy with the earnings and with their backlog of installations and their lineup of great films for 2006 -- Superman Returns, V for Vendetta, a few 3D animated films ... good stuff that should work well.

But the earnings alone certainly wouldn't have gotten this response on the Street. What I think is especially telling is not only that they're considering putting themselves up for sale, but that they're doing so from a position of strength. This isn't a weak company looking for help, but a company that is building in strength looking for a partner who can leverage that. The fact that they already had some unsolicited offers tells me that other people agree that the company isn't fairly valued at these prices, and it tells me that any buyout ought to come at a respectable premium.

Of course, that might not happen. The last company I owned that was bought out, Provide Commerce by Liberty Media, was also bought during a time of improving performance. The difference there was that the stock spiked up before the buyout announcement, which makes one suspicious, but the final price ended up being not much of a premium at all to the market prices at the time of the announcement. You never can tell.

Still, I like Imax and they're performing well. I would prefer to see them stand alone and get the kind of growth that I think they're capable of, but it seems clear that they believe their growth is stunted somewhat by their small size and they believe they could do better with a well-heeled partner or owner -- which at this point could probably be anyone, from one of their partners like Time Warner or Sony to a private equity firm or a theater company (though most of the theater companies aren't exactly flush with cash).

As long as they pay me a fair price, that's fine with me.

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Super IMAX?

Noticed that Imax (IMAX -- click to register for free RT streaming quote)got a couple plugs during the Super Bowl last night.

I don't expect this will have any dramatic impact on the share price over the next few weeks, but it was nice to see the trailers for V for Vendetta and Poseidon and see IMAX specifically noted ("coming March 17th to theaters and Imax") -- these films are expected blockbusters, and they will be simultaneously released on IMAX and in the multiplexes, which I think ought to drive some significantly higher IMAX ticket sales.

Though Imax has floundered along for many, many years as a venue for documentaries and spectacular experiential films in museums and science centers, the fate of the company and the stock has been wagered on the Hollywood blockbuster. With Warner Brothers hits like Harry Potter, Charlie and the Chocolate Factory and Batman Begins bringing in the crowds to Imax in 2005, the orders for IMAX equipment continued to grow and deals were signed with commercial theaters around the world.

There's a big risk here as well, of course -- Imax will only show a half-dozen Hollywood films in a year (and so far, it looks like they'll show only Warner Bros films), and if they get a few flops their reputation will suffer, which could lessen the enthusiasm among exhibitors for retrofitting their theaters, at great expense, to show Imax films. I don't think that's all that likely however -- the Imax experience is different enough to make a mediocre action film thrilling, and even a blah animated film that disappointed in regular theaters into an Imax hit (Polar Express).

As I said in my Annual Checkup, I consider this to be a speculative investment and I'm not itching to buy more immediately ... but if Imax dips down over the next few weeks before V for Vendetta releases in mid-March, I might have to consider buying more. The movie looks bizarre, but I imagine all the Matrix junkies out there will be lined up to give Imax a try.

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Annual Checkup -- IMAX

It was an interesting way to end the year for Imax (IMAX -- free RT quote). They had two big moneymakers on the Hollywood side of their offerings in Harry Potter and the reprise of Polar Express, and they've got impressive sounding direct-to-Imax offerings in last summer's Magnificent Desolation moonwalk film and the upcoming star power for their undersea 3D film with Johnny Depp and Kate Winslet, but the stock recently took a nose dive after an analyst downgraded them on reduced expectations for new installation growth among midsize commercial theater operators. As I wrote a few weeks ago, I'm not too worried about the possible reluctance of those small operators -- Imax is so early in their buildout of theaters and has such a strong order backlog that it's going to be a while before they need small multiplex operators to sign on in order to keep their growth rate up. I like that Imax is doing extremely well with international installation growth and that those overseas theaters are proving to be huge draws, whether it's in Israel or Europe or Korea with huge crowds gathering, or with their new deals to install theaters in South America, India and China. It's true that Imax continues to garner most of their cash flow from the installation of new theaters, but with a relatively modest valuation for their growth rate and a clear demand for the product and a focus on remastering Hollywood hits for the mega screen, I think they've got a good future. This is definitely a speculative bet, and I'm not planning to add any more to my position unless the valuation gets extraordinarily out of wack, but I plan to hold and see how this new generation of the Imax story plays out around the world.

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Not so Entertaining (LGF, IMAX)

Some of the entertainment stocks in my portfolio have been taking a real pounding lately.

Some of my old standbys are just standing around ... Marvel (MVL -- free real time quote from ADVFN) has been flying under the radar with no recent film news, and I think they'll be stable until news comes out about next year's films (though I also think this is a buying opportunity as we wait for Spiderman III and Xmen III). Dreamworks Animation (DWA -- free real time quote from ADVFN)has also been relatively free of news in recent weeks if you ignore what's been happening with their parent studio -- Wallace and Gromit didn't do as well as I would have liked, but Madagascar certainly evolved into a significant film and I'm looking forward to seeing how management handled the DVD market with this one in light of their Shrek 2 mistakes last winter.

But I've noticed some significant weakness in particular in IMAX (IMAX -- free real time quote from ADVFN) and Lionsgate (LGF), and my positions in both are down in the neighborhood of 25% today.

IMAX had a significant downgrade from an analyst who doesn't see mid-size theaters adding their MPX technology to multiplexes -- that may be true, and it sounds like the analyst did a solid channel check, but I don't see why it's a big concern. At this point in their growth cycle with significant overseas expansion and still very few theaters built in the US they don't have to win over the small operators yet. Small theaters follow the trends and have much less flexibility with capital spending than do their large competitors. If they need IMAX to compete in 10 years, perhaps they'll get it. I'm not worried that they don't yet have an interest.

More importantly, IMAX has had a great holiday season with Polar Express and Harry Potter -- more evidence that their strategy of remastering and releasing Hollywood hits and event movies is working great. As they continue to work out the installation backlog and gain new orders, we'll see these films all bringing in additional sales at very little additional cost. I see long term growth ahead (though it's still plenty risky -- the fancier and cheaper home theaters get and the shorter the time lag for DVD releases, the more the "event movie" and the IMAX experience will have to fight for attention). I filled out my IMAX position a number of weeks ago, and now I'm just sitting and watching.

Lionsgate (LGF-- free real time quote from ADVFN) is another matter -- but on the whole I'm optimistic moving forward. They changed their name (from Lion's Gate to Lionsgate -- WOW!), but more importantly the CEO recently spoke about guidance and about the need to refocus on their core competencies.

Their problems this year were the kind of standard Hollywood problems that this small company is not supposed to have -- they aim to buy and create niche film and other entertainment properties on the cheap, promote them effectively but inexpensively, and make money in the corners of the market where the big studios can't or won't succeed (horror, indie films, etc.). This year they had a few films with bigger budgets and significantly larger promotion budgets (Lord of War, Devil's Rejects, In the Mix), and all three of those films flopped at the box office and may or may not even break even on DVD and cable distribution. In light of this, I think management's assertion that they made a mistake in spending so heavily on these films is a good thing -- they recognize a mistake, they plan not to make it again. And even with those higher profile mistakes, the huge successes of Crash, Diary of a Mad Black Woman, and Saw II (a particularly big hit which I wrote about here) helped them have a decent year. We'll see how they do next year, but this is always going to be a volatile one.

I'm not making any decisions based on any of this stock price movement -- I fully expect both IMAX and LGF to continue to make dramatic moves on short term news, including both successful and unsuccessful film releases.

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Weekend wait paid off -- Bought Imax (IMAX)

I've been intending to make another IMAX purchase to fill out my position, and I was going back and forth over whether it would make more sense to do it pre- or post-Harry Potter opening. It looks like, for once (and for the moment), my short term decision to wait until this morning to buy paid off. If you're interested, you can see what I wrote when I made my first IMAX purchase here.

Bought Imax (IMAX) today, November 21 at $8.75.

As I type this, the shares are continuing to hover around my buy price -- down about 3% or so from Friday's close. Even though that 3% shouldn't end up making a huge difference to my return if I'm right about IMAX's long term potential, it's still nice to be on the right side of the short term move for once.

Before this year it never would have occurred to me to invest in Imax -- or in any other theater operator, for that matter. It seemed like an awful business. A Fool newsletter turned me on to the fact that IMAX is now carrying up to half a dozen first run Hollywood films a year, and that definitely piqued my interest -- especially after watching as Batman Begins and Charlie and the Chocolate Factory had great numbers in the Imax theater world.

IMAX is still most familiar to most of us as the musem theater operator -- exhibiting those great films about flying, undersea life, natural history, etc. that really create an immersion experience. It has been a huge hit and a revenue driver for nonprofit museums for years, and in my own backyard here in Washington all three of the Smithsonian IMAX theaters seem to be huge hits. For the most part, it seems like that nonprofit base is sticking with it's educational mission and showing the made-for-Imax films like Galapagos and the new Magnificent Desolation: Walking on the Moon (though the theater attached to the Smithsonian Natural History Museum is showing Polar Express 3D this year) ... and those films still seem to be doing quite well.

But the growth driver for the future seems to be the commercial IMAX theaters, in malls and attached to multiplexes, that can show both these great IMAX-showcase films as well as the IMAX-remastered Hollywood hits. Currently, there are about 150 theaters in the US, with about half of them in museums and similar institutions. New gigantic theaters are being built all the time with Imax technology, but the dramatic growth might come, ironically, with Imax going small -- they now have a new MPX format that can fit into malls and multiplexes much more easily and as a retrofit in existing theaters, but still provide a much more immersive experienct than standard projection.

Imax is not unlike lots of other businesses in that they have two basic revenue streams -- they have large up-front sales for designing and installing IMAX theaters, and then they have recurring income from ongoing maintenance and materials and from distribution of their IMAX-ready films.

It is a ridiculous comparison, but I am really struck by the correlation between IMAX and Intuitive Surgical (ISRG), another of my holdings and another that I found through the same Motley Fool newsletter service.

IMAX is not going to grow anywhere near as fast as ISRG, and they have been around a lot longer. But the similarities are there in the business models and in the outside trends that make their models look compelling.

Both currently depend on very large up front payments and orders for the near-term rapid growth of the business. ISRGN sells million+ dollar robotic surgery appliances, IMAX sells and leases multi-million dollar large format projectors and screens. In Imax's case, as with ISRG, new equipment installations currently make up well over half of their income.

But both also have recurring income -- ISRG with annual maintenance contracts and sales of the attachments and replaceable components of their systems, IMAX with service contracts and a share of film box office revenue. SunTrust is estimating that IMAX now has pretty good leverage with Hollywood and other producers of their films, and that they are now getting something in the range of 10-15% of box office -- not bad.

IMAX had a rough third quarter, which brought down the price a little bit -- which is nice as I was able to get my second position at a lower cost than my first. In general, the fourth quarter is their strongest for installation revenue so we should close the year well with up to 50 new theaters added in 2005 (and a backlog of orders waiting) ... but as those numbers of theaters grow (and IMAX is doing gangbusters business overseas as well), the box office share should begin to be a significant part of their income in the coming years.

Harry Potter appears to have opened well at the 60+ domestic theaters where it opened in Imax -- the CEO was on CNBC on Friday claiming sellouts in most cities and strong advance sales, but perhaps part of the reason for this morning's selloff was that they haven't released any specific numbers yet. It seems to be a bit of a jittery market, so maybe folks are afriad that the lack of news is bad news. I'm not particularly worried -- Potter won't make or break IMAX this year, and neither with the Polar Express, which they're hoping will be a recurring holiday special (in spectacular 3D, I'm told) and which should be out this week in many IMAX theaters.

In a few years, I hope the company will have grown it's network to the point that a film's box office is a huge amount of their income -- but, lucky us, they'll have to make hundreds of millions of dollars first installing all those screens. I hope it works out that way -- should be a nice show if it does.

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New buys -- MYGN and IMAX

I've made two purchases recently of companies that I found out about from my newsletter subscriptions.

First one: Myriad Genetics (MYGN)
Bought July 21, 2005 at $18.28

This one has so far been a short term bust, but obviously I consider my biotech investments to be just that -- investments for the long term, not trading vehicles to bump in and out of. I like the prospects for this one over the next several years as they ride the trend of predictive genetic medicine.

Not unlike Protein Design Labs, which is my most successful investment so far this year, Myriad Genetics pulls down a solid cash flow with one part of their business that is fairly predictable and lower risk, and uses that cash flow for the risky and potentially more lucrative business of developing new products, and in particular new drugs. That makes this a little less boom and bust than some other small biotechs that do not already have ongoing businesses or sales, and their expertise in developing and selling predictive tests should also give them a leg up on drug research and marketing as they work to develop new therapeutics for the same kinds of diseases as those tested for by their genetic tests. It's going to be several years before this one pans out, so unless they are bought out I have no plans to sell at any particular price point in the future.

And the other recent addition is Imax, which I just bought this week.

Imax (IMAX)
Bought August 18, 2005 at $9.90


I think if anyone is going to survive in the movie exhibition space, it's Imax. And I don't think the movie theater will die anytime soon -- there's just something unique about seeing a movie with a crowd, especially a big Hollywood event movie or epic.

It's true that the movie theater is becoming more and more of a hassle for regular visits -- high concession prices, traffic and parking, growing ticket prices, and ads in the theater. But I think the event movie will survive -- will your local enthusiasts be lining up at IMAX theaters for the next generation's Star Wars because the standard theater just doesn't cut it? Maybe.

After all, more and more, those event movies are going to be available on Imax. Batman Begins was a huge hit on Imax this summer, as was The Polar Express during the Christmas season. Imax is contracting out to grow their installed base (that installation is where they make the biggest portion of their income) at a very rapid rate. No longer will these theaters be only in a few big cities, and only in museums or other nontraditional theater spots. There will be more and more stand along Imax theaters, and, most importantly, there will be mini-Imax theaters at your local multiplex. Imax the company gets royalty revenue from the distribution of the films it converts to its format, and it makes money building and servicing theaters and leasing equipment, so although their installation cash is front-loaded they do have a solid and steady cash flow that grows with their installed base.

This phenomenon of event/action/epic movies on Imax is, I think, the key. I've opened a small position here, and I'll make future decisions about what to do (buy more, sell) when I see how they do through a couple key movie seasons -- this Christmas and next summer. If they choose the right films to convert and continue to draw significant crowds, which will cause more theater owners to want to add Imax to their mix, things will be looking rosy. This is a volatile one that has threatened to implode before and has a lot of debt, so step carefully.

technorati tags: MYGN, IMAX, Myriad Genetics, biotech

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