Comics, Movies, and Food

What a triple play. Specifically, I mean Marvel, Netflix, and Whole Foods. I think each of these companies has strong growth opportunities and is slightly undervalued in the short to mid-term.

Marvel
The industry reports on Marvel show it as a leader in its sub-sector (movie and licensing) with a strong balance sheet and good cash flow. Despite this, analysts on average are neutral or negative on this stock and performance for the past six months has been sluggish (down close to 5%). One interesting move that Marvel is in the midst of making is to start financing movie production for its characters using borrowed money instead of licensing the characters to a third party. This presents the opportunity for much greater revenue for Marvel with a successful film. Additionally, the debt is backed by the character IP for the film being made, so failure to repay the loan for that film will result in the character being licensed for future work, with no immediate financial loss to Marvel. The risk with this stock is that the character films will not do well over the next several years due to movie trends. Perhaps gritty, realistic cop movies will take over and comic book heroes will fall from favor among fans. I find this unlikely largely because the current age band of prime movie goers (15-40) grew up with comic books and has a large appetite for quality super hero movies. What if Marvel starts churning out crappy movies? Well, even Daredevil, which I purposefully did not see and which was not well received by critics, brought in $100 million more than it cost to produce ($78 million v.s. $179 million). Not bad for a crappy movie.

I am going to buy some Marvel stock now since it just dipped back down after a rally on share buybacks, and put some money aside for a second buy-in if the price dips sometime this summer. I expect a large (at least 30%) gain over the next 12 months as investors snatch up shares in anticipation of the Hulk and Iron Man (first Marvel financed films, one-two punch May and June 2008).

Netflix
Netflix has a strong business model, fanatical customers, and cash in the bank. But its stock price and P/E are at a low. Their primary competition, Blockbuster, is losing money trying to attract Netflix customers with lower prices, a strategy that can only work for so long. I expect Netflix stock to rebound once Blockbuster sees some bad news or raises prices. Netflix is also addressing the upcoming threat from Apple, Amazon, and others by deploying video download technology. High institutional ownership of this stock worries me since this makes the stock subject to short term swings as the big guys make their move. On the other hand, this could create opportunities for additional buy-in or to take some profit out. I expect this stock to grow by about 20% in the next year as more bad news for Blockbuster comes out and movie download turns out to be an idea that is still a little ahead of its time and perhaps too DRM-laden for the early adopters (hello Unbox!).

Whole Foods
Whole Foods has also taken a beating over the last year, falling almost 50% from its high in late 2005. This puts the stock price and P/E ratio at levels not seen since 2003. Analysts are generally neutral or slightly positive on WFMI, but the general consensus seems to be that it will drop another 10-20% to a P/E closer to 20. Of course improved performance with a flat stock price would accomplish the same thing. Part of the 'correction' in stock price also comes from reduced profits due to store expansion and a growing meme that this is 'just another grocery store' and should be priced as such. I disagree and see the store expansion as a good move to set the foundation for strong near-term growth and believe that WFMI is anything but just another Safeway or QFC. I think the twelve month upside on this stock could be as much as 10% growth, possibly higher if the Wild Oats acquisition is approved and handled well.

This is a stock I want to own because I believe that the company has what it takes for exceptional growth in the five to ten year range and because I believe in the product (local, organic, and green products) and the employees (outstanding customer service every time!!!). However, as anyone who bought in 2006 can attest, the next year or two could be a bumpy ride. Like Marvel, I plan to buy half of my shares now and another half later this summer in anticipation of an additional beating from the market.

Buy Low, Sell High

Tap, tap, tap. Is this thing on? Anyone still out there. :-) Yes, it's been a while. I still have a couple of posts from my Vietnam trip in various stages of rough-draftiness. Luckily I took good notes during our time at the Kids First Vietnam facilities, so I won't have to rely on memory alone.

I have a couple of bucks that I need to keep available, but don't anticipate needing more than 40% of at once. My plan is to put 40% in a high yield savings account (ETrade Savings: APY 5.05%) and invest the other 60% in mid to long-term stocks. To keep myself honest I will post the details of my stock analysis before each purchase or sale. To help make informed decisions, I purchased a one-year subscription to The Motley Fool Stock Advisor service. Most of my starting points for purchases will come from their recommendations. Sales and the occasional short-term play will be inspired by what ever randomness seems appropriate at the time.

Here is a list of stocks I am considering purchasing in the next week or two:
Quality Systems, Inc.
Netflix, Inc.
Whole Foods Market, Inc.
Sasol Limited (ADR)
Marvel Entertainment, Inc.
Universal Display Corporation