Here's how to play the movie theater selloff

Good morning investors. It’s time for another week of crazy market activity. Last week we saw a lot of volatility in the small and microcap space. Anything tied to the economy reopening got whacked. A lot of the names I cover and invest in sold off.

I took advantage of the volatility by purchasing more of the stocks I already like. I highlighted to subscribers the top seven names in my portfolio that I am actively buying. Subscribers can see that list here if you missed it.

We are coming into Q2 earnings over the next few weeks. I will be actively covering the seven companies I am invested in so keep a look out for updates on these names. Whenever the market gets incremental information there is typically a repricing or re-rating of the implied valuation. It is good to stay up to date on earnings as you can get some funky trading activity in illiquid microcaps.

In addition, I love to look at 52 week lows during earnings season. Sometimes when a company disappoints investors their stock tends to selloff in a big way. This happened with Stamps.com, Inc. (STMP) back in 2019. The stock went from $200/share down to $37/share. Nine days ago Stamps was bought out for $330/share. Anyone who was actively looking for 52 week lows would have made a killing.

Speaking of 52 week lows I have started to increase my position in my favorite movie theater company (this is not AMC). The stock has sold off over 30% since June and it is starting to look like a no brainer buy here. Here is my rationale for increasing my position.

  • Pre-COVID this company was trading at more than double the current valuation. I do think the streaming industry has taken some market share from theaters, but not half of the entire market.

  • The box office continues to improve. In June the domestic box office was $399 million and in the first 18 days of July the box office is already at $328 million. From 2019 levels we are still down more than 50% but every month is a continual improvement. I am guessing by the end of the year we are back to $600 million to $1 billion per month box office as more films are released. There is a lot more room for improvement.

  • There is significant “hidden” asset value that the market is completely missing. Any NAV or liquidation valuation points to a much higher intrinsic value.

  • Speaking of hidden assets, the management team is actively looking to sell real estate which should continue to unlock value and improve the balance sheet.

  • The balance sheet is top notch. There is almost no way this company goes bankrupt unlike its highly levered and overvalued competitors (looking at you AMC Apes).

  • Short interest is over 20% so we could get some wild trading should Q2 results outperform.

  • The management team is well aligned with significant ownership interest in the company and its future. The team has done a wonderful job in the past of creating shareholder value (special dividends, share repurchases, etc.) and should continue to in future years.

  • I think the stock double over the next 12-24 months providing investors a strong internal rate of return at the current valuation.

I am pretty comfortable underwriting this company at the current valuation and will be backing up the truck this week. I will use any selloff to materially increase my position. Get instant access to my research report by subscribing for only $10/month.

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Snippets

  • Iron Ore Bull Market Likely To Run Until At Least 2023, Goldman Analyst Says: Iron ore prices are being supported by very strong demand and suppliers have been disciplined in not increasing production. “It’s not really going to be until 2023, 2024, that the iron ore market will be kind of back to a more comfortable position,” the analyst stated.

    My Take: Steel demand is going crazy right now. Iron ore is needed to make steel so as long as the demand for steel remains strong so will iron ore. Not only are countries across the globe spending a significant amount to get out of the COVID-19 crisis — directly through infrastructure spending (which steel is a huge component of — but a continued push into going “green” will require a significant amount of steel, which I don’t see letting up. I am playing the steel trade by investing in metallurgical coal which is another component to make steel. Coal names are trading at 2-3x EV/EBITDA and have not had the same run as steel names due to the “coal” component.

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