Greedy When Fearful

Just purchased DreamWorks Animation (DWA) at 1.43 Billion, right near their all-time low. This is my wife’s pick as she loves watching their movies with our son and thought the stock looked cheap. I confirmed the valuation analysis to decide on size of position and read their latest 10-K. We decided to go with a large position, 7% of portfolio, because of how ridiculously cheap it is. Yes, never in the company’s history has the stock been so low. Trading at book value (what the company is worth if it was liquidated), these are Warren Buffet prices.  Facebook just paid 1 billion for Instagram. Dreamworks Animation is only slightly more than INSTAGRAM? YES!

DWA is just a baby and getting in at the beginning is how fortunes are made. It has only been public since Spielberg and friends spun it off in 2004. They have only released 21 films, which is amazing considering they are now on a release schedule of 5 films every two years. Racking up intellectual property with hits like Kung Fu Panda, Bee Movie, Puss In Boots, Shrek, How To Train Your Dragon and this company is just learning how to walk.

Stocks are always cheap for a reason. Physical sales of home entertainment have been declining since 2005 due to the increased popularity of streaming/renting/piracy.  3D mania has finally settled now that the industry has finally realized over-priced tickets with glasses are not the future, it was just Avatar. DWA also just paid a massive 289 million to a previous stock holder due to a one-time tax benefit change.

My biggest concern is the home entertainment decline and the future of theaters in general. When people have wall-sized screens at home and quit going to the theaters, my bet is they will have a business model figured out. With a low valuation, no debt, and 116 million in cash I think it’s a good time to bet on the future of our families and their massive amount of children.

Can you imagine a world where our children don’t watch cartoons? I can’t. Playing with toys that aren’t based on movies with brain-washing amounts of commercials and product placements (a la McDonalds)? If this isn’t the future then I’ll be a lot more concerned about being a slave for our alien overlords than losing money in an investment.

Monty