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February 27, 2008

Selling Regal Entertainment

I posted the following on Real Money before the open on February 27th explaining my decision to sell client holdings of Regal Entertainment. By way of background, Doug Kass is a major figure on Real Money and appears regularly on CNBC. He manages hedge funds that are dedicated to selling short. This means he bets on stocks going down. Over the time period that Northlake has been long Regal Entertainment, Doug was short most of the time.

I hope Doug Kass is sitting down when he reads this but I sold my position in Regal Entertainment yesterday. Doug and I have been back and forth on the merits of Regal for well over a year. For Doug it is a thematic short as he sees the movie theatre in long-term decline. For me it was a total return play in a stock that was too cheap because of what I believe to be the inaccurate myth that the box office is in long-term decline.

I think we both ended up right. I know at times Doug was short when the stock was moving between the upper teens and low $20s. I've been long since April 27th, 2006. I purchased the stock at $20.28 and sold it at $20.90 for a gain of just 3%. However, I have also collected 7 quarterly dividends of 30 cents and one special dividend of $2.00. Add that $4.10 to my side of the ledger and the total return is 23%. The S&P 500 is up less than 6% since then with dividends pushing the return to about 9%.

Regal turned out to be a pretty good investment for my clients but the reason I am quoting the returns is to remind subscribers that there are a lot of ways to make money on a stock. Total return investing is not as sexy as producing big capital gains but if you are going to make 23% who cares how you get there….

....The reason that I sold Regal yesterday is because the stock reached my recently revised $21 target which is based on 8 times 2008 EBITDA. The box office comps get real tough starting this weekend and pretty much stay that way until after Labor Day. While the box office is up 12% YTD, it could very well be down in the mid to upper single digits or worse by late summer before a great holiday lineup (including another Harry Potter film) rescues the year. Having owned Regal for almost two years I've seen how the box office trends impact sentiment toward and performance of the shares.

Even if the box office is down 10% by the end of summer, don’t look to me to support the box office is dying myth. The data doesn’t support it. It is a very low growth or stable business with bumps in both directions from year to year based on the films in theatres. Away from the box office Regal has a few growth avenues including in theatre advertising, tuck in acquisitions, 3-D, and the occasionally special event now possible due to digital upgrades. Around the recent lows of $17, I'd be back in the stock with few worries.

Posted by Steve Birenberg at February 27, 2008 08:44 AM in RGC