Luxury stocks only for the wealthy . . . Bad investments for the rest.

Am I the only one who believes that LRDRN,  LRDR3 and MTRX3 are currently overpriced?
Let’s evaluate each based on pure logic, reasoning, and basic investing principals, rather than on sheer exuberance for the property.  

LORD OF THE RINGS – “Fellowship Of The Ring”  (LRDRN)
Let’s first start out with a few suppositions.  (1)  I think it safe to consider this a fantasy/science fiction property, whose underlying material  has a large existing fan base, who potentially forms the target audience for the film.  
(2)  Historically, we know that the fan base of science fiction movies tend to attend such films as soon as the film opens.  With most “fanboys/girls” out on opening day.whatever day that may fall on.

LRDRN is slated to open on Wednesday December 19, 2001.  Consequently it’s opening weekend adjustment at HSX will be W+Th+(2.9x(F+S+S)).  For HSX purposes a film opening on a Wednesday drains off a percentage of the overall opening weekends box office, which usually undergoes the 2.9 multiplier (i.e. Wednesday and Thursdays numbers aren’t multiplied by 2.9, rather only count as is).  The best comparison I found for this movie was Star Wars: Phantom Menace, which also opened on a Wednesday.  39% of Phantom Menace’s 5-day opening weekend box office total came from the Wed/Thur box, which means that only 61% of the weekend’s box office was subject to the 2.9 multiplier.

For the sake of argument let’s assume that these two films attract a similar audience, who will therefore demonstrate a similar attendance pattern.  At it’s current price of $128.14, let’s calculate what the total 5-day box office needs to be for LRDRN in order for it’s HSX adjustment price to be at least $128.14, assuming that 39% will not be subject to the 2.9 multiplier.  I calculate tha figure to be approximately $59.5 million.

According to the historical tables over at Box Office Guru (http://www.boxofficeguru.com/open30+.htm) only three movies have had a larger opening weekend and those were May openings (probably Memorial Day Weekends).  The largest December opening was Castaway at $39.85 million.  

One thing that I have learned by playing HSX, these many years, is that nothing is impossible.and what seems least likely does occur at times.  For example, in June of 1998 HSX traders predicted a huge opening weekend for XFILE.  The TV show was in it’s prime with an extremely large television audience as the target demographic.  Anyone holding it long over that weekend got burned when it only opened to $30 million.  Like XFILE, LRDRN does not have a movie track record.  In this case, HSX’ers are assuming that a strong literary following, will translate into a phenomenally large movie attendance.  I don’t know about you, but I would feel more comfortable if we were discussing LRDR2, with previous LRDRN box office data to rely on.

I think that LRDRN’s current high price tag may be a result of three less than logical causes.  (1) A price run up last week, when it seems that HSX had the volatility turned up in overdrive.  As a result it only took a small number of purchases to drive the price upwards a significant amount.  (2) An over exuberance by the HSX trader fan base who tends to over value this type of movie genre.  (3)  Traders who don’t realize that this will be a 5-day opening and are thinking that it would only need a $44 million opening to reach this adjustment price.

There is a BIG difference between a $59.5 million and a $44 million opening.  While a $44 million opening in December seems like a stretch.  A $59.5 million opening will require an awful lot of warm bodies to fill up those theater seats during that pre-Christmas week.  Personally, at this point I don’t see it happening.  And, even if it could, it isn’t prudent for any but the very largest of portfolios to be tying up such a large amount of capital, on the assumption that it can beat this already questionable price, when there are so many other upcoming summer movies that have a better ROI than zero!   Unless you have a HUGE portfolio this is a blazing SELL at this price point.

Lord Of The Rings – “Return Of The King” (LRDR3)

This one isn’t due out till Christmas 2003, and at $112.65 it is already priced at only 12% less than LRDRN!  Does that make any sense to you?  We don’t even know if LRDRN is going to be the huge success that HSX’ers are assuming it will be (remember what happened with the XFILE assumption). 

Unless your portfolio owns 50K of every stock on the exchange and you still have extra cash in your money market account, tying up $5.6 million for 2-1/2 years is utterly foolish (based on proper investing principals).

MATRIX 3 (MTRX3)

Again, this one isn’t due out till the summer of 2003, and at $112.20 it is already priced at only 6% less than MTRX2!  At this price point it would require a $38.6 million opening weekend.  The original opened at $27.8 million.  With the probable rise in ticket prices between 1999 and 2003, and the known popularity of the original it is potentially possible for it to open at $38.6.  However this “potential” opening assumes that the franchise continues to have the audience interest shown by the original.  A lot can occur in the next two years.  Audiences have very fickle tastes.  What’s hot and the in-thing today can often become yesterday’s news tomorrow.  A roaring success of MTRX2 would go a long way to ease my suspicion.  But, here is a more important fact to consider.

If you have 50K of MTRX3 in your portfolio you are tying up $5.61 million.  If this were a “good” investment you would be expecting a good return on investment (ROI).  In order for it to have a “good” ROI, over such a long term, this movie would have to adjust to a significantly greater price than $112.20.  I ran the math on this.  In order to enjoy a 1% daily ROI (what we feel is a good investment), from today till adjustment day, MTRX3 would have to adjust to $995.00 which equal to a $343 million opening weekend box.  God forbid that inflation causes that to happen!

Once again, any high price stock in the neighborhood of MTRX3, LRDR3 or similar stock, opening as far off as 2003 or greater, is a luxury that very few HSX portfolios can afford.  In fact, there are some overpriced 2002 openers which the average trader could do without, but we will save those for another column.

Have a profitable day!

Aaron