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Lions Gate Entertainment: 'Divergent' Beats Lowered Expectations


There are still questions surrounding the global entertrainment company's future.

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The box office numbers are in, and Lions Gate's (NYSE:LGF) Divergent turned out to be... a question mark.

Divergent hit $56 million for its opening weekend, which is basically in line with recently lowered expectations, and most importantly, it was not a bomb. That means perhaps a bit more investor confidence in the already approved sequel, and we're seeing a relief rally in early trading following Friday's 8% drop.

A few weeks ago, there was talk of an opening in the $70 million range.

On Thursday (March 20), I noted expectations for a $50 million opening, but I should have been clearer; $50 million was more the bottom end of expectations.

However, I don't think this story is over yet because the opening weekend was relatively easy. There were a lot of Divergent fans who would have seen the movie even if it had 100% negative reviews. The next step is to monitor how box office returns fall off.

Here's a sampling of second weekend box-office returns for comparable films from

The Hunger Games: -61.6%
The Hunger Games: Catching Fire: -53.1%
Twilight: -62.2%
Harry Potter and the Sorcerer's Stone: -36.3%
Ender's Game: -62.0%

I'd say somewhere around -60% is what investors would like to see. (Harry Potter was an outlier.)

On Friday, I backed off shorting Lions Gate (subscription required) because I felt emotion entered the equation. I wanted to be the smart guy that went four for four on Lions Gate trades, and shooting for that type of ego fulfillment seemed unhealthy.

But my brain's been reset a little bit, and here's what I'm thinking:

I still have doubts about the sustainability about the dystopian teen sci-fi genre, and since what moves Lions Gate is expectations for blockbuster films, it's a little hard to get behind the stock. We're a long way from 2011 when 99% of investors hadn't heard of The Hunger Games.

You can't compare Lions Gate to diversified media companies like Disney (NYSE:DIS) -- it's more like Take-Two Interactive (NASDAQ:TTWO). Ideally, you want to anticipate the masses' anticipation of big releases and ride the subsequent wave of momentum buying.

Divergent didn't bomb, but it only hopped over lowered expectations. I don't think that's going to be a sustainable source of excitement, and so I'll remain on the sidelines.

However, there will likely be trading opportunities on both the long and short sides as we approach the November 21 release date of The Hunger Games: Mockingjay, Part 1.

Stay tuned!

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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