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Invest like Spielberg: Make money on movies Hollywood has been in a funk lately, turning out weak movies amid dwindling ticket sales. But amid signs of a turnaround, Lions Gate, DreamWorks and Pixar have potential hits on their side. By Michael Brush Even the Sith couldn't end the streak: Despite a record-breaking first weekend haul for the latest Star Wars installment, Hollywood remains in a funk, with 13 straight weeks of year-over-year box-office declines. The slump comes on the heels of a lousy 2004. Last year's ticket receipts would have lagged 2003 had it not been for the proceeds of a single unexpected hit, Mel Gibson's "The Passion of the Christ." Not surprisingly, the sluggish box-office take has contributed to declines in the shares of the companies with the biggest movie studios, or Time Warner (TWX, news, msgs), News Corp (NWS, news, msgs), Viacom (VIA.B, news, msgs) and Walt Disney (DIS, news, msgs). "The group has been pitiful," says Alan Gould, an analyst who covers entertainment stocks for Natexis Bleichroeder. So far this year, the big four are down around 10% compared to a 3% decline for the S&P 500 ($INX), says Gould. As Yoda might say: In the tank, the stocks are. Is the two-year slump a sign of some fundamental change in how we consume entertainment? Should investors give movie stocks the thumbs down? Or will this weekend's hit in waiting, DreamWorks animated "Madagascar," continue the Tinseltown turnaround? Heres a look at some of the popular theories about the movie malaise, and how a few plot twists could reverse the trend. Too many bad movies The most obvious reason why Hollywood is in a slump: The studios are simply producing too many turkeys. I think Hollywood has lost its way, says Michael Burns, a vice chairman at Lions Gate Entertainment, a film company with a knack for bringing out independent movies that turn out to be hits. Hollywood has become more formulaic. The industry has relied too heavily on gimmicks as opposed to stories, which does not lead to box-office success. Professional film critics pan Hollywood's output for the same reason. It has been a particularly dismal year in terms of quality, 'must-see' films or even entertaining blockbusters aimed at a mass audience, says Richard Roeper, the "Ebert & Roeper" and Chicago Sun-Times film critic who wrote Schlock Value: Hollywood at Its Worst. Films such as Guess Who and XXX: State of the Union are just garbage. But insiders know Hollywood could turn things around in a snap. I think the industry is going to have big summer, says Burns. In addition to Star Wars, Burns believes Steven Spielbergs War of the Worlds, with Tom Cruise, and The Wedding Crashers will bring moviegoers back in a big way. Look for a solid response to Batman Begins as well, says Roeper. I don't think a two-year streak signals a permanent slump, he says. In a year or two we'll be talking about a box-office explosion. Too many choices Are some darker forces at work? Its no coincidence that the box-office weakness overlaps the rise in popularity of video games, says John Chambers, an entertainment stock analyst with Mellons Private Wealth Management Group. Males in their late teens through early 30s -- the prime box-office demographic -- now play video games an average of five times a week, for at least a half hour each time. Parents have their own reasons to stay home. Home theaters are better. Movies come out on DVD faster. Meanwhile, the price of tickets, popcorn and gasoline are way up. And many moviegoers lament the lack of civility inside theaters these days. Middle-aged movie fans dont like the hassle, the noisy audiences, says Roeper. I hear all the time from parents of younger children who say they love it when Roger (Ebert) and I talk about new video releases, because these folks haven't been to a theater in years. They do all their movie-watching at home. Again, though, neither of these threats looks like they will do permanent damage. Young viewers will always like to get out of the house, says Roeper. And moviegoers in general enjoy the communal experience that comes from watching a hit together in a theater, says Larry Haverty, a media analyst at Gabelli Asset Management. There is nothing like seeing a movie with very strong technical effects in a theater. Besides, movie studios can make as much money from DVD sales as they do at the box office. From 2000 to 2003, major studios got 15.5% of their domestic revenue from the box office, 31.5% from home video rentals and 4.3% from pay TV outlets like Home Box Office, according to Wade Holden at Kagan Research. How to play Hollywoods comeback So how do you play an expected Hollywood comeback? The biggest studios all belong to larger media empires, or behemoths like Time Warner or Viacom. They have too many moving parts to be good pure plays. Haverty, for example, likes Disney because he thinks its film division will eventually snap back with the release of "The Chronicles of Narnia" and sequels to "Pirates of the Caribbean." But his fund group also owns the stock because of the strength of Disneys theme parks and the turnaround at ABC, thanks to hit television shows like "Desperate Housewives" and "Lost." If a purer box-office play is what you have in mind, here are three stocks to consider: Lions Gate: Diary of a hot stock Shares of Lions Gate Entertainment (LGF, news, msgs) have advanced 54% since I suggested buying the stock last June at $6.70. But the plot line at this company hasnt changed. So investors should see further, if more modest, gains. In short, Lions Gate does a good job at keeping a lid on costs -- while enticing big stars to do films with alluring story lines. Recent hits include Crash, Saw, Diary of a Mad Black Woman, and Open Water. Lions Gate also distributed Fahrenheit 9/11. They have had incredible success with recent movies, says Robert Routh, media and entertainment analyst at Jefferies & Co. Looking ahead, Lions Gate has a Saw sequel coming out and deals to produce movies based on Marvel comics. Lions Gate has developed a reputation in the movie industry as the distributor of choice for independent filmmakers, says Routh, who owns Lions Gate shares. Underneath it all, the company has a huge film library that generates enough cash to cover its overhead. Routh thinks the shares could trade above $13 in a year. He also suspects Lions Gate might be a takeover candidate at some point -- for a minimum of $15 per share. My review: Ill give Lions Gate two thumbs up for potential gains of at least 30% if you buy now under $10. DreamWorks: Will Madagascar work? Unlike moviegoers, Wall Street hates surprises. So when DreamWorks (DWA, news, msgs) missed quarterly earnings by more than 30% and lowered its 2005 outlook on May 11, investors promptly sold shares of the studio where icons Spielberg and Jeffrey Katzenberg toil. While Wall Street analysts considered it a Titanic quarter, others wondered if DreamWorks might be a buy after falling 22% to $32 in four weeks. To be sure, its going to take management some time to earn back credibility on Wall Street. Fulcrum Capital Groups Richard Greenfield, for example, says he has a tough time understanding how DreamWorks didnt know about sagging "Shrek 2" home video sales -- the culprit in the recent blow-up -- when it held an analyst meeting in early April. DreamWorks may be poised to get a boost. On Friday, May 27, it will release Madagascar, featuring the voices of Chris Rock, Ben Stiller and David Schwimmer. Since the best time to buy movie stocks is after a blowup or between hits, its tempting to pick up some DreamWorks shares here. Entertainment stocks usually have lumpy quarters as they are essentially hit driven, says Linda Killian, portfolio manager at IPO Plus Aftermarket (IPOSX, news, msgs). Madagascar has good buzz and it opens soon. One thing that may help: the film was deliberately kept short -- about 85 minutes. This means it can run six times a day per screen, instead of the more typical 4 or 5 times per day. Investors may also find comfort in the fact that Spielberg maintains a huge position in DreamWorks stock. And despite their frustration over the last quarter, Wall Street analysts still have a $39 price target on the stock, according to Thomson Financial. DreamWorks gets one thumb up as a somewhat risky play for possible gains of over 20% if you buy under $32. And despite their frustration over the last quarter, Wall Street analysts still have a $39 price target on the stock, according to Thomson Financial. DreamWorks gets one thumb up as a somewhat risky play for possible gains of over 20% if you buy under $32. Pixar: An Incredible-y rich stock price Pixar (PIXR, news, msgs) remains the gold standard in wide-screen animation. Creator of beloved feature-length cartoons like The Incredibles, Finding Nemo, and Toy Story, Pixar also has thrilled investors with a steady stream of earnings surprises. The Incredibles -- Pixars second biggest film after "Nemo" -- has grossed an impressive $631 million worldwide. Continued strength of the Pixar slate should leave the company with a cool $1 billion in cash (and no debt) by the end of 2005. The next release: Cars, due out May 2006. But Pixars success is no secret. The stock trades for a rich 51 times forward earnings. Unless Pixar pulls a DreamWorks and disappoints Wall Street -- which is unlikely -- youll need patience to get shares at a meaningful discount. I dont think their box-office results will ever suffer, because Pixar movies have been come to be viewed as an event, says Routh. That leaves two options. Put the stock on your watch list and buy if market volatility moves it back down into the low $40 range, says Routh. Or buy now for the long term. Ill give Pixar two thumbs up as a company, but two thumbs down as a stock on valuation. At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. "If you could make a difference, what would you do?"...Said Kakese Dibinga __________________________________________________ Do You Yahoo!? Tired of spam? Yahoo! Mail has the best spam protection around http://mail.yahoo.com [Non-text portions of this message have been removed] Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/scifinoir2/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! 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