Lions Gate Entertainment Corp. (USA) (NYSE:LGF) stock fell as much as 7% on Wednesday as the entertainment company announced that its largest shareholder, MHR Fund Management, is selling 10 million shares of LGF stock in a secondary stock offering.
Secondary stock offerings are rarely welcomed by Wall Street, but investors were particularly displeased with the size and price of this particular transaction.
LGF stock closed at $33.68 per share on Tuesday, and the secondary offering priced at $32 per share; as of this writing, shares were trading at $31 and change in the wake of the announcement.
Admittedly, it doesn’t look good that the fund selling 10 million shares is run by the Chairman of Lions Gate himself, Mark Rachesky. That said, there’s simply no reason for LGF stock to suffer a selloff of this magnitude.
Here’s why investors should brush off Wednesday’s decline and begin thinking of this pullback as an opportunity, not an omen:
No Dilution — But Strong Box Office Results
What’s somewhat baffling about the selloff today is that Rachesky has been interested in tendering his position in LGF stock before. In October 2014, LGF stock soared on chatter that MHR Fund Management was considering selling its 37.4% LGF stake to red-hot Wall Street darling Alibaba Group Holding Ltd (NYSE:BABA).
Although that deal never materialized, it told the market — in no uncertain terms — that Rachesky was looking to exit or pare his 51.3 million-share LGF stock position. And yet, despite this telegraphed signal, some in the financial media are actually surprised by today’s news.
Even Mad Money‘s Jim Cramer couldn’t wrap his head around it:
“Why the heck does he need to sell ten million shares, especially after a guidedown? How do you spell BRUTAL?”
Still, while the secondary offering isn’t exactly positive news, I’m still bullish on LGF stock. The company itself is actually doing quite well and still has a number of highly anticipated blockbusters up its sleeve.
Most recently, Lions Gate made a splash with its second installment in its Divergent series with the film Insurgent, which opened with a $54 million box office weekend on March 20 — just a few hundred thousand off the $54.6 million showing of the premier film in the saga, Divergent.
In less than three weeks, Insurgent has already grossed $225 million worldwide on a budget of $110 million. Gotta love it when you double your money!
Of course, The Hunger Games franchise will likely be the main driver of LGF stock in the latter part of this year, as the final installment of the franchise, The Hunger Games: Mockingjay – Part 2, comes out in November. Part 1 was very nearly the top-grossing movie of 2014, reeling in $337 million at the box office despite a more limited IMAX release than its predecessors.
Taking a cue from itself, Lions Gate is milking the Divergent cash cow for all it’s worth, releasing the final chapter of that trilogy in two separate films due out in 2016 and 2017. Sprinkle in a Power Rangers movie scheduled for 2016 that piggybacks on the cultural obsession with retro characters and superheroes, throw in TV production credits that include mega-hit series like Mad Men and Netflix, Inc.‘s (NASDAQ:NFLX) Orange is the New Black, and you’ve got to wonder: Is there really good reason to be bearish on LGF stock?
Not in my book.
As of this writing, John Divine was long Jan 2016 $37 LGF calls. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
