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

This red head bombshell is 19 and hitting the clubs 7 nights a week.

Ms. Netflix,  her stamina is unbeatable.  After missing a 40% move on January 28^th by 2 days, I have been waiting 5 months for a decent pull back to start my position. Maybe the flash crash on May 6^th, 2010, the biggest Dow one-day drop in history? No, NFLX only dropped 2%!  How about the worst May since 1940 in the market? Netflix GAINED 12%. Amazing! It looks like she’s stepping off the dance floor for a quick breather, and I’m starting my position @ $115.75, after a 6% pullback. At a current P/E of 50, a F P/E of 30, this is one expensive stock. However, with a growth rate of 30%, that gives it a PEG of 1.7.  If it’s below 2, it’s growing fast enough to justify the high multiple. Only a 2 star CAPS rating, but I think they’re wrong.

This stock is ignoring the market because things have never been better for Netflix. 3 million iPads were sold in 80 days, and Netflix is the #1 app for the iPad. Wii (50 million users) support just started. PS3s (25 million users) and Xboxes (30 million users) are just starting to use Netflix.   Netflix is spending to increase their on-demand library, preparing for the future. With “only” 14 million subscribers, there is a massive amount of growth potential. If Netflix’s subscribers were to quadruple, that would still be only half of the gamers out there.   NFLX is currently valued close to Blockbuster’s 2002 prime, with a market cap of 5.6 billion. This concerns me, but with no retail space, and a rock solid income stream subscription model, I can see Netflix easily hitting 10 billion within the next 5 years. 

Hopefully this stock will cut in half within the next year, so I can buy more.  But, I learned my lesson after missing a 120% move while waiting for a hangover that never came.  It’s Friday night and I’m buying the next round of shots!

Monty

P.S. I also doubled-down on our JPM position @ $38.54 and I posted our entire portfolio here:

Ever hear Warren Buffet’s advice “Rule #1, never lose money. Rule #2, never lose money. ” ? That “advice” annoys me because not only is it obvious it isn’t helpful and is snarky. I prefer “I would rather fall through the basement than the roof.” Basically, to focus on the downside, the upside takes care of itself.  The stock market isn’t rational so buy when prices are so low the downside is minimal. You won’t even break your legs if you fall through the basement.

A 12% (23 billion) drop is a MAJOR over reaction IMO to BP’s oil rig accident. Another example of front page news making a great buying opportunity.  From what I have researched, worst case scenario the cost will be around 3 billion. BP’s insurance will cover around 1.5 billion of the cost.

FPE is 6.53. PEG is 1.6. Market cap 165 Billion. Price/Book 1.58. 4 star CAPS rating.

With the yield being at 6.39%, this is like being on the other side of an auto-loan. Even if the stock goes nowhere, it will still pay the average S&P 500 return via dividends. Add DRIP (Dividend Reinvestment Plans) to the equation to a tax free Roth IRA and this pick will DESTROY the averages.

BP has been on my radar since they bought Devon’s (DVN) international assets in early March. I need more international exposure so adding the UK to the mix is perfect. Oil and natural gas is a great lifetime investment and I’m kicking off my oil/nat gas basket with BP!

Monty

I’m launching my stock picking dairy with this pick as it sums up my favorite investing advice, “Be Greedy When Others Are Fearful” (Warren Buffet) and my favorite Greek God, Gamblor.   Gamblor is said to be the God of speculative investing (Homer J Simpson). When panic makes the front page, that’s when I put my chips on the table. On Tuesday, the headline “Greece downgraded to junk” caught my attention and NBG, which was on my wish list, had a 15% pullback. Only 15%? As you know, Greece going bankrupt has been looming for a while now and NBG has fallen from $8 to under $3 since October 2009 (for a total 60% pullback.) Perfect! Thank you Motley Fool Global Gains for putting NBG on my radar. NBG is priced for death but long term, I think it will be just fine, mainly thanks to Turkey. Here is why I’m buying NBG:

1. Largest bank in Greece lending $68 billion to Greece customers
2. Foreign lending makes up 29% of bank loans. NBG owns Finansbank and has branches in Turkey, Bulgaria, Serbia, Romania, Albania, Cyprus, and Macedonia. Turkey makes up 43% of NBG’s earnings and has been growing 18% per year!
3.  NBG is one of the most highly capitalized banks in Europe with a strong brand name.
4. 30% of Greece’s debt is owned by the French and Germans. Greece won’t go bankrupt.  IMF director said Wednesday “We have to do this because if we don’t fix it in Greece, it may have a lot of consequences on the rest of the European Union.”
5. The details of the Greek bailout should be announced this weekend
6. Price To Book is only .62!
7. FPE of 5.23!
8. These facts were provided by Motley Fool’s Tim Hanson & Nathan Parmelee and they actually visited NBG in person. Tim and Nathan have a great head on their shoulders.

I add money every month so all my positions are bought in increments. I try to keep my cost basis to around 5% of my Portfolio. Enough to count if I’m right, not too much pain if I’m wrong.  You only need one home run to kill the market so I take a lot of swings.  I have a huge tolerance for risk, and a 30 year timeline. So if my investments drop 50% or more I think “Should I buy more?” This is an extremely risky investment.

Monty