Holy crap is it hot out today.  It’s so hot that the only difference between the East Coast and hell is that Jim Cramer isn’t in hell, yet.  Anyway, the market was rebounding a bit after downing several vials of muscle relaxant to help cure the severe case of lockjaw it developed from going down so much and so frequently over the past few weeks, but that all changed in the afternoon when reality sunk back in to investors’ portfolios.  While this was likely a minor temporary relief rally, like Mel Gibson’s career after his first anti-semitic tirade but before his second tirade where he told his wife that that he was going to burn the house down among other colorful and completely insane ramblings, you should all trade in to it carefully.  And yes, things have now gotten so bad that Money McBags is forced to use Mel Gibson’s racist rants as analogies for the market, so we’ve got that going for us, but at least we’ll always have the dot-com boom.

The main problem today is that macro news is lighter than Suze Orman’s resume and that is why the market tried to rally a bit.  The ISM released their non-manufacturing index which measures 90% of the legal economic activity in the US and to the surprise of no one (other than analysts, economists, and CNBC), it fell to 53.8 which was a 4 month low and below the 55 guess of analysts.  Out of the 11 metrics the ISM measures, 10 slowed down and one stayed the same (something called Supplier Deliveries, and in this economy all deliveries are being supplied in the rear). 

Internationally, Australia kept interest rates at 4.5% claiming “uncertainty about the pace of future global growth.”  Though if you read the fine print, they say the uncertainty is whether it will be 0%, negative, or global economy crushing.  Finally, the market waits for Thursday’s ECB policy meeting where Jean-Claude Trichet will try to the soothe the market’s fear of european banks failing by assuring them that stress tests will be run and then offering the market a nice sitz bath.  While it’s nice that the ECB is contemplating stress tests (which will no doubt show that european banks need to add more fish oil to their diets, start running for 30 minutes a day, and clean up their fucking balance sheets to try to get healthy), there is absolutely no way that european banks don’t get a clean bill of health and there is absolutley no way the ECB’s assessment will be correct.  151 banks just rushed to get funding from the ECB which is the most in a year and if that is a signal of health, than my name isn’t Money McBags.

In large cap stocks, a report from the Semiconductor Industry Association showed chip sales were up 47% last month thanks to demand from China, India, and the Lawson family.  This has helped lift chip stocks and regardless of the economy, Money McBags is a believer that the pace of technological advancement will continue to accelerate and thus having some semi exposure in your portfolio should be a longterm benefit like windpower should be a benefit to the environment,  saving should be a benefit to the economy, and a tracheotomy to Lady Gaga should be a benefit to ending noise pollution.  Also, BP was up today after an upgrade by RBS from “Hold” to “Buy.”  In addition to that upgrade, RBS announced they will be dropping the “R” from their name to hereby just go as “BS” and are retroactively initiating coverage on Enron with an “Accumulate” and Kate Beckinsale with a “Sell.”

In small cap news, it is ugly out there.  Money McBags favorites KITD and KIRK continue to get pounded even though they are so cheap that if they were materials, not even China would use them.  KITD is a bit funky because so much of their revenue is Euro driven so Money McBags has no feel for their upcoming revenue because a lot will depend on the average fx rate they use in conversion as well as the actual revenue split.  So he expects them to miss analyst revenue estimates in the short term but long term, this company is growing 50%+ ex. currency effects, it is in a fast growing market, and they are among the biggest players with cash to spend to continue the roll up.  This is the time to be building a position here even though the market is totally full of shit.  You wait for chances like this to buy good companies cheaply, same with KIRK, so keep KITD and KIRK front of mind.

One interesting name which continues to fall and is becoming more appealing is IMAX.  Money McBags broke them down a few months ago but basically they have been able to grow rapidly due to a JV theater strategy that has allowed them to open more theatres and take less risk.  The did $42MM of adjusted EBITDA in Q1 but that was driven by a little something called Avatar which has now passed through the theater system like a kidney stone through a urethra only with less pain and with more aliens.

In the quarter prior to last, the company did ~$20MM in EBITDA (so $80MM annual run rate) and estimates are for $100M both this year and next year with the Avatar business leaving but new theaters picking up that lost growth.  The current EV is ~$800MM so the company is trading as 8x to 10x EV/EBITDA which isn’t terribly cheap on the high end, but at the low end, it is getting to be attractive (not quite Alice Eve attractive, but probably Amber Lancaster attractive, and Money Mcbags is ok with that).  The problems are that there has been a lot of retail money in this name which needs to get out, there is fear of pricing pressure killing their high ticket premiums, it is unknown how many JVs they opened this Q, and the business still relies on content and content is fickle (as noted by the brilliant WGP which every now and then misses the mark, like perhaps today, but in Money McBags’ defense it is very very hot).

The most recent Shrek movie underperformed because at some point even little kids can only take so much of Mike Myers so that, on the heels of Avatar going CGbye, is setting up IMAX for a top line miss.  Today, the stock was down 10%+ on no news other than pretty decent numbers for the latest Twilight movie which is sure to slowly, unoriginally, and vapidly kill pre-teen brain cells everywhere.  IMAX brought in $9MM from that likely abortionally bad movie in the opening week which is certainly at least as good as they could have expected.

Look, Money McBags could talk about EBITDA, revenue growth, and Ashley Greene in 3D, until he turns bluer in the face than a depressed smurf but the issue with IMAX stock is not the fundamentals, it’s the investor base.  The stock was a high flyer, a momentum trendy name that drew in a lot of retail investors who institutional investors and hedge funds were able to continue to milk until deciding to blow out.  Basically, once Avatar left and the story went from “we have the hottest fucking movie in history in a unique format” to “come watch an animated donkey in 3D,” growth investors ran.  They bought the rumor and sold the news as if the news had slept with Magic Johnson.  So now IMAX is in that weird stage where momentum investors have left and it is not yet cheap enough for value investors to buy.  That thesis makes less fundamental sense than string theory, but it is what it is.  So with institutions having puked this out, retail sellers are now taking their losses and when they wash out, value investors may start to kick the tires, check the oil, and make sure all of the company’s johnson rods are in order.

So look, Money McBags thinks this company is certainly on pace to do $80MM-$100MM of EBITDA this year and will likely at least hit those same numbers next year as JVs grow and people take even fewer vacations and thus spend more money on cheap family entertainment.  So if you are a longterm owner, you don’t need to ditch anything here.  That said, this should trade down with the market as people take gains and value investors probably won’t get interested until ~6x EV/EBITDA and if they earn $80MM-$100MM of EBITDA, that is still 25%-40% down to go, so you can probably still find a better entry point.  Now it is possible for the company to earn much more than $100MM of EBITDA next year, but one has to make a few leaps of faith on JV openings, content, and the economy not going to $0, to get there, which is why Money McBags prefers to use the safer $80MM-$100MM run rate.  The company basically needs to show they can perform without Avatar and while Money McBags thinks it is likely they will continue to drive traffic, he would hold off buying for another 20% down (and if it rockets up and you miss it, you need to be ok with that) because no matter how much you try there are four things you shouldn’t do in life:  Spit in to the wind, start a land war in Asia, forget to look for the Adam’s apple, and fight the market.  So keep IMAX on your watch list and get ready to pounce when it washes out.

And don’t forget, When Genius Prevailed recently joined Facebook to make it easier to spread the gospel.

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