But traders must work to find diamonds in the rough

Once-sizable video outfit Image Entertainment last week received a buyout bid of $22.6 million from RLJ Acquisition, led by Black Entertainment Television founder Robert L. Johnson. Because Image stock has traded between 3¢ and 19¢ a share in the past year, it qualifies as a “penny stock,” an arena in which Hollywood can lay claim to dozens of very small companies in the film, TV and music business.

Their shares are usually priced at less than $2 each (and often at just pennies), and trade in obscurity on backwater stock exchanges such as the OTC Bulletin Board and Pink Sheets. Their stock market capitalization (price of one share multiplied by total shares outstanding) is typically just single-digit millions or less, which is microscopic by Wall Street standards, so they also are referred to as microcap stocks.

It’s a topsy-turvy world, in which a publicly listed movie company like Odyssey Pictures (“Hank and the Cowdog”) trades at 5¢ a share — roughly where it’s been for two years, except for two spikes, one up and one down. Camelot Entertainment (“A Warrior’s Heart”) trades at 1/100 of a penny, so its whopping 7.2 billion shares yield a market capitalization of only $720,000.

That’s not to say that there’s no value in this eccentric group. “There are a couple of gems in there occasionally, but they’re very hard to find,” says media analyst Hal Vogel. He adds that it’s difficult for investors to profit in trading penny stocks, with their low trading volumes and low prices, because quotes don’t move much.

Some of these companies have colorful names such as Goliath Film and Media, and 4th Grade Pictures. Others use catchy titles for their products, such as the movie “Run! Bitch Run!” — which was connected to Camelot Entertainment and Guitammer’s ButtKicker-brand of low-frequency sound equipment for movie theaters.

To pounce on opportunities, some of these entertainment companies have diversified into other areas, which include business such as zinc mines, debit cards, the Internet or any other sector that might turn the heads of investors. Red Rock Pictures, which billed itself as being in the business of the finance, production and marketing of filmed entertainment, merged with an office-supplies company, changed its name and pulled out of Hollywood altogether.

On the other hand, plenty of penny stock companies stick to media and entertainment. Despite their small size, they often roll out big plans, issuing press releases suggesting associations with billion-dollar industries and famous names. But those releases often conclude with legal disclaimers pointing out risks and uncertainties.

Some microcap companies are so small they’re exempt from disclosure requirements normally associated with being publicly traded. Mainstream Wall Street investment houses steer clear of the penny stock category, making reliable third-party investment advice and analysis hard to come by. But there are tip sheets and sponsored research paid by the public company itself to generate investor interest (with a disclosure that some form of payment was received by the researcher).

Then there are those instances where big companies shrink to microcap status, such as Image Entertainment and BB Liquidating, the successor to video retailer Blockbuster. The vidtailer’s operating video businesses were sold to Dish Network. BB Liquidating’s restructuring advisor declined to comment about the shrunken successor firm, whose shares recently traded at just 3¢ each.

In some cases, public shell companies, with only some cash and publicly traded shares, position themselves to merge with a private established business. This is called a “reverse takeover,” because the established business emerges as public, but is often renamed to reflect the new operation.

As for stock transactions, share prices might be pennies, but some companies create billions of shares. Buyers Group Intl. shrank its authorized shares to 1.3 billion earlier this year, from 50 billion previously. In contrast, media conglom Viacom has just 557 million shares outstanding.

With many flamboyant operators bent on driving up stock price, the media/entertainment penny stock category has had its share of turmoil. For example, in 2008, Daniel Laikin, who at the time was CEO of National Lampoon, pleaded guilty to federal charges of manipulating the price of the company’s listing — a longtime Hollywood penny stock. Elsewhere, a dozen media/entertainment companies that listed on Germany’s high-flying Neuer Markt rode a wave of exploding share prices in the late 1990s — despite being little more than startups — and then cratered when the slump in the technology and media sectors ended their ambitious plans.

Some of these public stocks have kept their focus on the media sector and achieved longevity, such as Odyssey, which has been a public company since 1989. But Odyssey’s chief exec warns that growing and costly financial reporting requirements from federal regulators in the post-Enron era are making it difficult for small companies to remain publicly traded.

“There’s seems to be a report (that needs) to be filed every 20 minutes, and we spend more money on that every quarter,” laments Odyssey topper John Foster.

Camelot chairman Robert Atwell echoes the sentiment: “A lot of good little companies out there in the film business and elsewhere won’t be able to remain public; won’t have access to capital and won’t be able to grow.”

Still, being able to raise money publicly is well worth the hassle to many small companies. Notes entertainment financial consultant Doug Lowell: “The way these companies seem to stay alive is by issuing more stock, and not so much (by) their operations.”

What: Listings that trade for a few cents a share dot the showbiz sector.
The takeaway: The model suits small firms looking to raise coin by issuing stock. But risks abound.

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