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Lions Gate: What if Dystopian Teen Novels Have a Dystopian Future?


Expectations for the entertainment company may be too high.

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Following Monday's ugliness (subscription required), Lions Gate (NYSE:LGF) took another hit Wednesday with Wall Street starting to sour a bit on the movie Divergent because of the trend in negative reviews we highlighted.

I dumped Lions Gate back on March 11 (subscription required) because of growing worries (subscription required) that Divergent wouldn't hit expectations.

Divergent has felt like it's had maybe 20% of the hype the first Hunger Games did. And it doesn't have the type of romance/love story factor of the Twilight series, which was basically this teen generation's Titanic.

I recently mentioned that I was looking at the short side for Lions Gate, and there's still some appeal there.

If Divergent disappoints (current expectations are for around a $50 million weekend opening), then it follows Ender's Game as a franchise investors will write off.

While Lions Gate is no Disney (NYSE:DIS), it does have a solid portfolio outside of these tentpole franchises. But the stock moves based on awareness of and expectations for the big movies -- not the strength of the whole portfolio. The tendency has been for Lions Gate to run up big before a hot movie is released, at which point expectations top out and a sell-off comes. Through that prism of behavior, it's basically the Take-Two Interactive (NASDAQ:TTWO) of film/TV companies.

So if we assume Ender's Game is still up in the air, and Divergent doesn't turn into a real franchise, what does that leave to drive the stock?

There are two more Hunger Games sequels that will, in all likelihood, be big hits, but everyone knows about them, and without another blockbuster franchise to pick up the slack, long-term expectations have to go down.

But wait -- there's another ugly angle to consider. If Divergent disappoints, will investors start worrying that the dystopian teen sci-fi trend is on its way out?

Could the fact that Barnes and Noble (NYSE:BKS) and (NASDAQ:AMZN) are packed with Hunger Games clones be a sign that the top is in?

That could damage expectations for the crown jewel itself (The Hunger Games), which would mean all bets are off.

And what does Wall Street think of Lions Gate now? According to Bloomberg, there are 12 buy ratings, two holds, and zero sells, with a $39.73 average target price.

They're certainly not considering the worst-case scenario, which seems to have a growing likelihood of coming true.

I'll update Buzz readers if I take action. For now, I'm on the sidelines.

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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