Why I Don’t Believe This Struggling Film Stock Is Dead Yet

Generally speaking, my go-to trading strategy involves looking for a contrarian investment opportunity, a stock that is out of favor with the stock market but may be deserving of a chance. 

I mean, why always buy a stock when everyone else wants to? It’s akin to buying something that is priced higher because it’s popular, but the market demand is greater than the supply. 

In contrarian investing, you wait for the supply to exceed demand to take advantage of the investment opportunity. 

The company should have a solid foundation, business strategy, and competent leadership. This is why I generally only buy blue chip stocks when they plummet, because I realize it’s only an aberration and the stock will bounce back as an investment opportunity. 

Now having said that, the associated risk of contrarian investments is also higher than average, as the company may fail to turn things around or the turnaround could take years to pan out, which would mean your capital is not being effectively used. 

If you are mindful of the risk, then contrarian stocks could return some tidy profits as an investment opportunity. 

One such company that I have been following ever since its initial debut years ago is DreamWorks Animation SKG, Inc. (NASDAQ/DWA), the maker of such animated film classics as Shrek, Madagascar, and Kung Fu Panda. 

The 3D (three-dimensional) rage helped to drive DreamWorks to stardom and become a Wall Street sensation in early 2010, when the stock was trading hands for more than $42.00 a share. That was then, but the stock has since been trading erratically and is at the mid-$20.00 level, trying to find direction. 

DreamWorks is a contrarian investment opportunity that could pan out if it can turn around its operations. The dependence on the success of its 3D films in theaters has led to some disappointments as box office flops hurt the company. 

For instance, the first quarter (ended March 31, 2014) saw the company lose a whopping $0.51 per diluted share, which was $0.37 short of the consensus estimate. Revenues in the first quarter came in at $147.2 million, a decline from $204.3 million in the preceding fourth quarter. The major decline was due to a massive $57.0-million impairment charge associated with the poor showing of the film Mr. Peabody & Sherman. Moreover, the recent launch of How to Train Your Dragon 2 is also not faring as well as the company had hoped. 

As such, the company is pursuing a strategy to diversify into other non-film businesses, such as television and consumer products, which have been gaining in their significance to the company’s overall revenues. DreamWorks also offers television specials, series, and live entertainment to the global market. 

Wall Street seems convinced the company can turn around. Annual revenues are estimated to rise 12.8% to $797.2 million in 2014, followed by a 25.5% jump to $1.0 billion by 2015, according to Thomson Financial. 

Technically, following a strong rally to $36.00 in December 2013, DreamWorks has been on a steady decline to below its 50-day moving average (MA) of $30.63 and its 200-day MA of $29.83. We need to see the stock hold around $22.00–$23.00 to be an investment opportunity. 

 

Chart courtesy of www.StockCharts.com 

Investors are clearly betting against a turnaround as the short position of 10.06 million shares, or 22.6% of the float, as of May 30 is heavy. The good news is that a rally in the stock could drive short covering support and make the stock an investment opportunity. 

Whatever the case, DreamWorks could produce a nice return as an investment opportunity if the estimates pan out and the company turns its operations around. 

This article Why I Don’t Believe This Struggling Film Stock Is Dead Yet was originally published at Daily Gains Letter