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Judge David Ryan • Location: Natick, MA
• Member since: July 2004
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The HSX Report -- 5/22/07
May 21st, 2007 11:01PM

Welcome back! Today's topics: your daily IPO fix, and this summer's early blockbusters.

The Girl from IPOnima

Three issues today. The chaff first, before the lone stock of wheat....

(1) Moliere (MOLIE) -- H$3
You had me at "Ludivine Sagnier". You lost me at "French period comedy". Pass.

(2) My Best Friend (MYBFR) -- H$3
You lost me at "delightful French comedy". You never had me. Pass.

Let's face it -- French films open in arthouses, sell $20,000 of tickets, then go straight to DVD. Except for Amalie -- but that's the exception to the rule. Don't spend your H$3 on a stock that could very well delist at H$.03 or so. Three million bucks is a lot if you're opening on 24 screens.

But there's one significant profit item on the docket today.... and it's a StarBond, of all things!

(3) Jonah Hill (JHILL) -- H$30

I have no clue who Jonah Hill is. For all I know he's a saint among men, the next Jim Carrey, or Hitler Jr. What I do know is how to add some numbers and then divide by five. And I think reasonable expected grosses for Knocked Up and Evan Almighty, plus Accepted, plus even a halfway decent showing by Superbad, equals about $45-50M in TAG by Labor Day. Strong buy, if you've got cash to play with. If you're thin, I don't (and never will) recommend tying up cash in bonds.

I may discuss the bond market in more detail in the future, but for now, here's my take: I think it's difficult to make significant returns in StarBond trading unless you read Daily Variety and the Hollywood Reporter. Believe me -- as soon as a star is attached to a near-term project, the StarBond market will immediately reflect it. There is no mid-term in the StarBond market -- either you day-trade the volatility, or you buy and hold when someone's had a run of bad luck and hope they turn it around (think Eddie Murphy or Bill Murray).

Today's Feature: 2007 Summer Blockbusters (Part 1)

Sadly, the time for quadruple-digit returns on this summer's crop of big-ticket films has probably passed -- I think PIRT3 IPOed slightly before the release of the first film -- but all is not lost. Unfortunately for small investors (or HSX newcomers), these securities are trading in the hundreds of dollars, and require significant cash outlays if you want to buy in now. But even small investors can get in on the fun, via the magic of options. But first, let's look at some of the bigger films coming soon to a theater near you...
(Prices are representative prices that were available at some point in the last couple of days -- your mileage may vary)

Pirates of the Caribbean: At World's End (PIRT3)
Price: H$391.86
Release date: 5/25/2007

Why is PIRT3 pushing $400, while SHRK3 is hanging in the H$330s? One reason: PIRT3 will adjust based on the long weekend. So its four-day gross will go into its Monday adjust. However, the multiple used for the adjust is reduced from 2.9 to 2.4. This only happens a couple of times a year, and it's always fun. Right now, the market is predicting a four-day $167M take for Jack Sparrow and his gang. Can the film pull in this kind of money? Sure. Frankly, I wouldn't be surprised if it actually exceeded that. Given the unexpectedly high opens of Shrek 3 and, earlier, Disturbia, could we be on the verge of a $200M opening? You never know. From an investing standpoint, though, this is a dry hole. H$20M is a ton of money to spend to buy into this hand. Even the options are probably priced out of profit potential. But if you own it already, enjoy the ride.

Harry Potter and the Order of the Phoenix (HPOT5)
Price: H$259.22
Release date: 7/13/2007

Are you *^%#@ing me? I can buy in to Order of the Phoenix at H$250? Sign me up. I think this is a case of the market not seeing the forest for the trees. Truth be told, H$250 is probably a fair price for HPOT5. A fair delist price. Potter films have tended to be "leggy" -- they open strong, then linger. But aye, there's the rub -- they open strong. If Shrek 3 made $130M on its opening weekend, won't Harry Potter 5? I've got H$12M that says it will. Just remember one thing: sell immediately after it opens.

Ocean's Thirteen (OCEN3)
Price: H$96.20
Release date: 6/8/2007

The price is pretty much commensurate with Ocean's Twelve, which delisted at H$107. I think it's undervalued, and I'm fully invested... but I'm worried. As near as I can tell, there's zero buzz about this film. Also, it's got stiff competition in Surf's Up on its opening weekend -- a film that's looking better and better the more I see/hear about it. This film could do well and still cause me to lose my shirt... a $25M opening would equal a H$1.2M loss right now. This film is going to depend on building itself up via its reviews, and that's always a risk. Someone hold me, please....

Knocked Up (KNCKD)
Price: H$84.62
Release date: 6/1/2007

Here's your sleeper hit of the summer. First, it has no competition other than week 2 of the Pirates juggernaut to deal with. Second, it's got cross-gender appeal. Third, it's got the etherially hot Katherine Hegl. Fourth, it's another Judd Apatow film, and we all know how well The Forty-Year-Old Virgin did. I'll go out on a limb and say that this film WILL make more than $84M in four weeks. It may not open huge, but I can see it doing steady business as a great date movie.

Surf's Up (SURFS)
Price: H$81.94
Release date: 6/8/2007

I knew nothing about this film until maybe two weeks ago. Now I'm sold on it. It looks like another animated winner from Sony in the vein of Ice Age. Against Hostel II and Ocean's Thirteen, it has the kid market cornered for this weekend, too. If reviews indicate that it will at all appeal to adults... it could win the weekend. Still, this second weekend of June figures to be the most competitive of the early summer weekends. At H$81, the market is looking for a $28M opening right now. I think that's achievable, and there may even be some room for improvement there. Tough call on SURFS.... Tough call.

Fantastic Four: Rise of the Silver Surfer (FOUR2)
Price: H$149.81
Release date: 6/15/2007

The original Fantastic Four film... um... did not exactly duplicate the success of Spider-man. It did, however, make a lot of money -- more than you probably thought. (FFOUR delisted at H$136.) Now, I know that you should never judge a film by a trailer.... but this one looks much better than the original. Plus, its only competition for the weekend is Warner Bros.' dubious Nancy Drew. For all I know the film may be crap, but I think it's going to at least make its $50M on opening weekend. A cautious buy.

Evan Almighty (ALMT2)
Price: H$123.80
Release date: 6/22/2007

I've got no clue. Pros: Steve Carell. Cons: it's been an agonizingly long and expensive production, which usually doesn't bode well. It's also up against an interesting sleeper, the John Cusack/Sam Jackson Stephen King film 1408. If it's not funny, we could have a major catastrophe on our hands. Or, it could have a $175M opening. Like I said, I have no clue.

Live Free or Die Hard (DIE4)
Price: H$134.38
Release date: 6/27/2007

I pick "live free". Yippie kai-ay, mother... um, wait, this is a family blog. Here's another one I'm undecided on. It will probably do well, but I don't see it being an "event" release like Pirates or Spider-man or Transformers. Which probably puts it in the $40M-$60M open range. Hence, there could be some real profit potential here, if the numbers wind up at the high end of that range. Or, it could be just about where it should be. If you put a gun to my head and made me choose... another very cautious buy.

That brings us up to the next holiday weekend, July 4th. The Transformers and beyond tranche of blockbusters will be discussed in a future blog. But first, as promised... how can you make money off of a H$200 stock when you've only got H$2M to play with? The answer:

Opening weekend options!!!!!

The Wednesday of the week before the week a film opens (so about 10 days prior to opening), HSX will offer MovieStock Options for the openers for the weekend following the next weekend. For example, tomorrow we get the option for Knocked Up, which opens the weekend after next. There's a call and a put option for each film. These options -- like real options -- have a "strike price" that is fixed prior to their issuance. It's the same for both the call or the put. They are always offered at H$2.

So what's the play here? When buying an option, you are betting that the weekend gross of the film will exceed (call) or fall short of (put) the strike price of the option. On the Monday after the opening weekend, one option (depending on which side of the strike price the gross fell) will cash out at a value equal to the difference between the gross and the strike price (divided by $1M), while the other cashes out at zero. It's easier to demonstrate using real numbers. Let's take Knocked Up, whose options are set at H$30. If I'm right, and it's the sleeper hit of the summer and pulls in $50M on its opening weekend, its options will cash out as follows:

Call option (KNCCA): H$20 ($50M minus the $30M strike divided by $1M)
Put option (KNCPU): H$0

If I'm wrong, and KNCKD takes in a paltry $6M for the weekend, it goes like this:

Call option: H$0
Put option: H$24 ($30M strike minus $6M actual divided by $1m)

Unfortunately, you can only buy 10,000 of any given option. Still... if you had bet right in these two cases, and bought the max (which would have only cost you H$20,000), you'd have cleared a profit of H$180,000 and H$220,000 respectively. Which raises an interesting point -- don't forget that these options have a cost, which must be figured into your calculation. Hence, the effective strike prices for the KNCKD options -- the real-life grosses that will determine whether you profit -- are actually $32M and $28M for the call and put respectively. Make sure you take that into account in your purchasing decision.

But you can see that options can provide big profits for small money. Typically the HSX powers-that-be will price the option based on the underlying security's trading value, plus a little -- hence, KNCKD, which is trading around H$85-90, gets a $30M strike price, because that's what the market is predicting. Sometimes, though, they get it wrong. Shrek 3, for example, had an option strike of $105M. I think everyone knew that $105M was low for that film. Hence, everyone maxed on the call and shorted the put -- and made a lot of money doing so. Look for these opportunities, and you will do well.

That's all for today. Keep buying low and selling high! And if you have comments/thoughts/questions/suggestions for this blog, please post them in the Cinema Verdict section of the Witness Box, or email me at Excelsior!

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