Upcoming blockbusters could boost movie chain stocks

I have to admit that one of my guilty pleasures is watching movies on a big movie screen. My wife and I really enjoy science fiction and superhero type movies. We see anywhere from 10 to 15 movies every year. Sometimes we will even see the same movie more than once.

2017 has been a rough year for the film industry, with the North American box office suffering its lowest-grossing summer in 25 years. Ticket sales are down 10.8 percent this summer and have decreased by nearly 3 percent year to date. Box office flops such as “The Mummy” and “Baywatch” have hurt Hollywood but there will be some upcoming movies this year that could turn into blockbusters.

Release dates in November and December of 2017 include Thor: Ragnarok, Justice League and my personal favorite Star Wars: The Last Jedi.  Upcoming movies in 2018 appears to be very strong with:

  • Black Panther
  • X-Men: The New Mutants
  • Avengers: Infinity War
  • Han Solo,
  • Deadpool 2 
  • Ant-man & The Wasp.

However, investors have really punished the movie chain stocks. U.S. chains, Regal Entertainment (RGC) and Cinemark (CNK) are down 35% & 25% respectfully over the past 6 months. Cineplex (CGX) the largest Canadian chain is also down 25%, see chart below:

The vast majority of theaters in the U.S. keep a larger percentage of the ticket sales the longer the film is in the theater. For example: opening weekend they may get 10%, the 4th  week up to 25% and the 10th  week up to 50% or more. While concessions account for only about 20% of gross revenues, they represent about 40% of theaters’ profits. Profit margins on soda and popcorn average 85 percent.

All three of these stocks pay dividends, Regal has the highest yield of 5.7% followed by Cineplex at 4.35% and Cinemark with 3.43%. I expect that their 3rd quarter results could disappoint which would be a good buying opportunity. However, there is a risk that the price of these stocks could move up in anticipation of better future earnings.

Possible ways to trade a rebound in movie chain stocks

  1. Take a half position now and buy the other half after 3rd quarter earnings are released
  2. Buy a full position near the ex-dividend date, to get paid while you wait
  3. Buy half position, sell covered calls and sell cash secured puts for the other half.
  4. Buy some long calls near 4th quarter earnings release scheduled for Feb. 2018

Being an option trader, I am going to wait until Feb 2018 options are available. If the VIX which measures volatility stays low, I will probably buy a call option on one or two of these stocks.

 

Disclaimer: This post is for discussion purposes, do your own research.

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A big disconnect between the Stock Market and the Canadian Economy

Canada’s economy is expanding at its fastest annualized rate in six years according to Statistics Canada. That’s a quarterly expansion rate of 4.5% which is the highest figure since the third quarter of 2011. It was led by the biggest binge in household spending since before the 2008-2009 global recession.

Economists had predicted Canada to grow around 3.7% and the Bank of Canada latest forecast was for GDP to expand at 3% in their July press release. When combined with the 3.7% expansion of the first quarter, it’s the strongest six month start in 15 years.

Why isn’t money pouring into the Toronto Stock Market?

Often times the equity market is moving well before the economy does and of course the Canadian equity market had a robust year in 2016. Investors may already have priced in all the good news last year, when Canada’s stock index gained 18 percent, one of the world’s best performances.

Part of the problem is that Canada’s stock market isn’t totally reflective of the economy, since it’s heavily reliant on energy and financials. Those two sectors account for 54 percent of the S&P/TSX Composite Index.

The outlook for oil is very subdued, it is still trading below $50 a barrel even with the shutdown of refineries due to hurricane Harvey. Global inventories continue to stay high and OPEC’s has lost its influence in cutting production. Crude oil prices in the future’s market are still below $50 a barrel for all of 2018 and part of 2019. Foreign investors are taking money out of the Alberta’s oil patch.

Continued growth in residential investments which was up an annualized 16 percent in the first quarter is also likely to fade as the impact of government measures to cool housing markets kick in. Although, bank earnings have beat expectations by a wide margin, loan growth going forward is expected to decline and loan losses are expected to increase. U.S. hedge funds are still shorting Canadian financials expecting the housing bubble to burst.

Investors believe that this robust growth will force the Bank of Canada to continue raising interest rates this year. It could add extra pressure to lowering consumer spending due to high indebtedness of Canadian households. It will also add a cooling effect to the hot housing prices in both the Vancouver and Toronto real estate markets. The rapid rise in the value of the Canadian dollar is added proof that currency traders are betting that a hike in interest rates is coming soon.

Uncertainty over NATFA  renegotiation

Global political developments aren’t helping, with renegotiation of the North American Free Trade Agreement which started in August, created a new spat with the U.S. erupting over aerospace manufacturing.

Already, data suggest investment into the country is cooling. Foreign direct investment in Canada dropped 25 percent to C$8.68 billion in the first quarter, according to separate data released Tuesday. The country relies heavily on foreign funding to finance spending — totaling C$130 billion over the past two years, according to balance of payment data.

Canada has benefited from a convergence of developments that include a coordinated global recovery and rising trade volumes. The bottoming of the oil shock in western Canada, along with federal deficit spending, rising industrial production in developed economies. Canadian consumers have benefited from a buoyant jobs market and rising home values, resulting in a surge in consumer spending.

Is this Sustainable? I think not!

Economists had been predicting a slowdown in growth to about 2 percent in the second half of this year, but are revising numbers up after the GDP report. I believe this surge in economic growth is temporary. The higher value of the Canadian dollar and higher interest rates will dampen economic growth.

The Toronto stock market returns for all of 2017 are flat which could indicate that foreign investors also believe the future going forward isn’t so rosy!