Greedy When Fearful

Judgment Day for Blockbuster.

I love penny stocks with a million dollar brand and a turnaround plan.

My strategy for buying stocks with the possibility of bankruptcy is to buy more shares every time the stock drops 50%. If Blockbuster drops from $.24 to $.12 that’s a 50% loss. However, if I buy at $.12 and it recovers back to $.24 that’s a 100% gain. This simple math rule can make it quite easy to rack up doubles IF the company doesn’t actually go bankrupt. My cost basis for Blockbuster is now about 10% of my portfolio, which is bordering on too much risk for me. I’m 33, so I still have about 7 more years until our portfolio needs to be more cautious. I won’t be buying more at $.6 however. I’ll either hit the eject button should bankruptcy be announced or ride this thing back up. This is my personal Judgment Day for Blockbuster.

Will BBI (BLOKA) survive?

Blockbuster is the first 10-K I have ever read and there is plenty to be worried about. Half of it reads like a Stephen King novel. Here is why I think Blockbuster will fail:

1)      Massive debt. 855 million in debt due to a stupid one time dividend payment (thanks to how Viacom spun this company off in 1999.) They just missed their one time debt payment which could be the kiss of death or means they are going to announce a refinance in August.

2)      Loss every year (over 5 years) except 2006. Domestically, 2005 loss was 583 million vs. 2009 loss of 558 million. I’m actually quite surprised 2009’s loss is so close to 2005 and not larger.

3)      Dozens of mentions of possible bankruptcy and closing operations mentioned in their 10-K.

4)      Extremely competitive. Anyone who sells or rents movies/games. Wal-Mart, Best Buy, Target, Gamely,  Netflix, Apple, Amazon, Red box, GameStop, Satellite, Cable, Internet piracy, etc.

5)      It’s a race to the bottom price wise. Renting/buying movies has never been so cheap.

6)      NCR bankrolled their kiosks. However, they also control price and location of these kiosks. Blockbuster gets 50% revenue from only old releases (26+ weeks old) and only 1-10% on new releases.

7)      No streaming from Blockbuster’s iTunes app. You can only look up physical movie availability.

8)      No XBOX, PS3, or Wii app yet though one has been rumored.

9)      Reverse stock split failed, stock was delisted from NYSE, and management isn’t being direct about it. BBI is now BLOKA.PK and trades on the pink sheets. Visit www.blockbustershareholders.com to read the drama. I love the price from the delisting, but wonder if Blockbuster doesn’t care because they know bankruptcy is going to be filed. Hopefully, they don’t care because they are negotiating a non-bankruptcy lifeline.

10)   Mark Wattles, founder of Hollywood video has sold a half a million of his Blockbuster shares. Is he jumping ship?

Am I stupid for buying even more shares of a doomed company? Quite possibly. It’s a roulette bet, and could go either way. Here is why I think BLOKA.PK will land on black and succeed:

1)      5.5 billion in revenue in 2005 and 4 Billion revenue in 2009. Not too bad considering 2009 was one of the worst economic years in history. Their store movie rentals are hanging in there better than I would have guessed with Internet streaming entering the mainstream.

2)      Aggressive cash conservation strategies in 2009. Reduced costs by 600 million in 2009, plans to reduce by another 200 million in 2010. If they keep this up maybe they can erase that 1 billion debt payment.

3)      Closed 885 underperforming stores out of 7,405

4)      Selling/licensing  international markets to redeploy capital but retain brand and move to a digital strategy internationally.

5)      They hired turnaround specialist Jeffrey Stegenga from Alvarez & Marsal in July to specifically help them avoid bankruptcy.  

6)      Blockbuster is valued at only 26 million! This is pocket change. Netflix is valued at 6 billion.

7)      Game rental subscriptions in store and soon to be in kiosks. Redbox and Netflix currently don’t rent games.

8)      Blockbuster gets the hits 30 days before Netflix and Redbox.

9)      The only brick & mortar store left standing. Hollywood video is gone.

10)      Blu-ray is more successful than I would have guessed. People care about HD TV. This is a huge advantage over what happened to the music industry with SACD and the death of the physical album.

11)   10,000 rental kiosks by end 2010. Currently only 2,000 kiosks are installed.

12)   Blockbuster On demand for 30 different Samsung products, Motorola app to watch movies on HTC HD2, Droid X, PC streaming.

13)   DVDXpress founder, kiosk pioneer and renegade Greg Meyer’s joined the board.

14)   Movie rental market forecast to grow in 2010

15)   Hollywood video founder owns 17 million shares of Blockbuster. 373 shareholders own almost 20% of Blockbuster. The average Blockbuster exec holds between 2-5% of the company. These are passionate people who will do everything they can to prevent losing hundreds of thousands of dollars.

Before reloading at 12 cents, BLOKA is a 60% loss for us. Even with this extreme risk however, I’m still beating the market by almost double. The latest numbers can be found here.

Thanks,

Monty