Monday, May 14, 2012
There's a big trade setting up in the market's most overlooked "boom and bust sector"...
Most investors don't realize it, but the entertainment industry is a lot like other "big potential" sectors of the market, like biotech or gold mining. When a small research firm or a little exploration outfit finds "the big one," shares can soar. The same is true in entertainment.
Take Disney (DIS), for example...
Just this week, Disney surged to a fresh all-time high.
Disney's latest movie, The Avengers, just set a record for the biggest opening weekend in movie history. Domestic ticket sales topped $207 million, blowing away the previous record-holder (Harry Potter and the Deathly Hallows) by nearly $40 million.
Shares are up about 50% since October. And that's nothing compared to what can happen to a much smaller outfit... like Lions Gate Entertainment (LGF)...
In March, the movie producer hit an all-time high. It's behind the hit movie The Hunger Games. It generated over $150 million in its first weekend, making it the third-highest-grossing opening weekend in movie history (now fourth behind The Avengers).
Leading up to the movie's release, shares just about tripled in the space of a year.
I think we could see Disney-like performance from a few other entertainment stocks this year... and maybe even a repeat of Lions Gate's huge run...
Video game publishers like Activision Blizzard (ATVI), Take-Two Interactive (TTWO), and Electronic Arts (EA) are all looking for the next big hit. And the hits here can be huge...
Last year's installment of Activision's Call of Duty: Modern Warfare, for example, generated $1 billion in sales in just 16 days. Take-Two's signature franchise, Grand Theft Auto, sold over 22 million copies over its lifespan. At an average of $60 a copy, that's a stunning $1.3 billion in sales.
Even a "non-blockbuster" like Take-Two's Red Dead Redemption sold about 9.5 million copies in its first year. At $60 a copy, that's easily nearly $600 million in sales.
And even the largest of the three, Activision, is a fraction the size of Disney's $81 billion market cap.
More important, the video-game sector is hated by investors right now. Overall, video-game sales are down in each of the past three years, mainly due to the collapse of the once-popular Nintendo Wii console. There isn't anything Wall Street hates more than a lack of growth.
Meanwhile, the sector has suffered from a lack of new blockbusters. Electronic Arts has been the worst offender over the past year, thanks to poor results of its Star Wars PC game. Take-Two was punished last week after the company announced it will delay its much-anticipated Bioshock Infinite release to early 2013 – past the critical holiday sales season.
As you can see, these names underperformed the rest of the market over the past six months...
However, expectations and valuations are super-low for these game publishers. Activision and Electronic Arts are trading around 12 times earnings. Take-Two is a steal at six times 2013 earnings estimates.
Investors should keep in mind that these companies publish dozens of games each year. Right now, Wall Street analysts aren't expecting any upcoming release to be a new "breakout" franchise that generates multiple future titles.
Meanwhile, each company will deliver one of its already-existing franchise products for the 2012 holiday season. For example, Activision will release another Call of Duty game, while Take-Two will be shipping out a new installment of its wildly successful Grand Theft Auto series.
Compared to other areas of the entertainment sector, these hated video game publishers are in position to deliver double-digit returns for investors within a few months if sentiment improves – even without a big hit. If one of their upcoming releases is the next "blockbuster," it could result in triple-digit gains.
Frank first introduced Take-Two to Growth Stock Wire readers in June 2010. Shares soared by 58% in less than a year. Read the original story here: This Is My Favorite Stock Right Now.
Elsewhere in the entertainment industry, some of the largest companies in the world are waging a "war for your television." These World Dominating tech names are looking to penetrate the growing market for TV over Internet. And if any of them succeed, investors can expect a higher long-term growth rate than anyone could imagine…
Asian economies are slowing... fresh three-month lows for China, Japan, and Korea funds.
Market weakness isn't affecting the big biotech uptrend... biotech funds XBI and IBB are sitting at all-time highs.
Low-risk telecom "toll road" Verizon breaks out to a four-year high while paying a 5% dividend.
Credit recovery continues... credit card companies American Express and Discover are both up 25%-plus since November.