The new Michael Bay-directed film, Transformers, opened this past Tuesday to record receipts of over $27 million. That’s over $11 million dollars higher than the previous Tuesday benchmark, established by the second installment of the Pirates of the Caribbean series.

As the summer movie season up shifts to top gear, investors typically regret not participating in the hundreds of millions of dollars many individual films will generate.

But investing publicly in Hollywood today is pretty much limited to large-cap media giants. The domestic movie business is very competitive, but is dominated by the “big six.” They are Paramount, Sony, Buena Vista, Warner Brothers, Fox and Universal.

NBC and Universal Pictures joined forces in the spring of 2004, and both are owned by General Electric. Disney releases films under the Walt Disney Pictures label, as well as under recently acquired Pixar, as well as Miramax and Touchstone. Warner Bros. obviously is part of Time Warner. Sony Pictures is a key component of the Japanese mega electrics giant. Viacom owns several studios, including Paramount, Vantage, DreamWorks, MTV Films and Nickelodeon Films. News Corporation owns Fox.

While small-cap investment opportunities in Hollywood are rare, we have found one for this months’ Small-Cap Strategy Report that’s intriguing.

But Hollywood today is so much more than motion pictures released in cinemas…

The Motion Picture Association of America (MPAA) reports that 86% of households that have televisions also have at least one DVD player. That equates to 96 million U.S. households.

Netflix and Blockbuster have been big beneficiaries of DVD adoption. But savvy investors should take a look at the proliferation of DVD kiosks across the country as a possible new investment opportunity. A company called Redbox has about 4,000 un-manned kiosks in highly traveled retail locations. Consumers today are picking up and dropping off DVDs while buying groceries or making weekly trips to Wal-Mart.

McDonalds owns a major portion of Redbox, as does another company that knows a little something about the kiosk business — Coinstar (CSTR: NASDAQ).

At $892 million in market cap and trading at 1.7% sales, I think Coinstar is a stock to look at as a not-so obvious way to play Hollywood by using small-caps.

Until next time,
Craig
July 5, 2007

Investing in Hollywood was originally featured in the Penny Sleuth.