A year and a half ago, yours truly here penned some bullish thoughts on a then-still-somewhat-unknown film and TV studio known as Lions Gate Entertainment Corp. (NYSE:LGF). Consumers loved some of the programs and films the company was responsible for, like TV's Mad Men and the then-still-new first installment of The Hunger Games movie series. Most of those fans, however, may not have even realized LGF was the organization behind those hits.
Oh, to be fair, a few investors put two and two together, bidding up Lions Gate Entertainment shares from less than $8.00 per share in September of 2011 (just a few weeks before The Hunger Games was released) to around $12.00 by May of the following year when I last looked at the stock. By and large though, most folks didn't think much about how to invest in a TV show's or a movie's success, and most traders who read my bullish take on the opportunity either (1) didn't care, or (2) didn't agree.
Big mistake. Not only is LGF now the owner of a now-huge movie franchise (the second Hunger Games movie opened this past weekend), but the organization is still filming the wildly popular Mad Man on top of raking in some nice cash flow from several TV series it's behind. Oh, and by the way, the stock's now trading at $30.00, up 150% since my call a year and a half ago; it had been up as much as 200%.
I'm not revisiting Lions Gate Entertainment Corp. to pat myself on the back, however. I'm revisiting the stock now to reverse may call and say if you stepped into LGF a year and a half ago on my advice, it's time to take your profits by exiting the trade.
I've got a feeling I know what you're thinking ... that I'm nuts. This company just released what's apt to be the biggest movie of the year, and I'm bailing out? Yep. Just hear me out.
If I had to venture, I'd say about 85% of real investing success (defined as "beating the market") is rooted in spotting undervalued opportunities that nobody else sees or believes in ...yet. That described Lions Gate Entertainment two years ago before Hunger Games put it on the map, and even described the stock a few months after the movie was released. A lot happened in the year and a half after that, however - LGF came into its own, developing a following that fully valued (and then some) the stock's price.
That's a good thing and a bad thing, the bad thing being the undervalued opportunity has been erased by completely unfurling. In fact, it looks like the bulls overshot their target, and are now correcting their mistake. They're not done making that correction, however.
Trading 101: Sometimes the news and fundamentals lead the chart, as was the case with Lions Gate Entertainment Corp. in 2012 and most of 2013. Other times, the chart tells you how the market is trying to interpret the fundamentals and prospects. That's LGF now, but more than that, the chart says traders are on the verge of collectively deciding the stock's overvalued... even more than the already have.
The weekly chart of Lions Gate shares below tells the whole story. The runup was great, but too much. Now the momentum has swung the other way, pulling LGF all the way back to its 200-day moving average line (green) which is a HUGE make-or-break point for a stock. If shares close under that line currently at $29.93, odds are very good that a whole slew of observers will come to the conclusion that shares are entering a nosedive, which of course will prompt the very selling activity they're fearing. More than that, a technically-weakening stock seems to somehow turn the fundamentals and the rhetoric bearish, where they'd been seen as bullish before. That chatter exacerbates the selling snowball. And for what it's worth, the downtrend's momentum has been so decisive and so strong, I'd be shocked if the 200-day moving average line didn't buckle as a floor.
This isn't a judgment call on the company. Lions Gate is still a great company with a great TV and film library. The stock's disconnected from the company's value right now, however, and like it or not, we have to respond to that reality.
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