Why Movie Stocks Won't Recover This Year

Star Wars: The Last Jedi absolutely trounced the box office this week, but movie stocks across the board are still down.

In today's MarketFoolery podcast, Chris Hill talks with Taylor Muckerman from Stock Advisor Canada about why that is and what it might take for the industry to recover. Also, they talk about what the tragic death of CSX (CSX -1.95%) CEO Hunter Harrison might mean for the railroad company, why investors should watch marijuana and cannabis stocks next year, how BlackBerry (BB 1.10%) is finally managing a turnaround after years of weak growth, and more. Tune in to find out more.

A full transcript follows the video.

This video was recorded on Dec. 18, 2017.

Chris Hill: It's Monday, December 18th. Welcome to MarketFoolery. I'm Chris Hill, joining me in studio from Stock Advisor Canada, Taylor Muckerman. One week to Christmas!

Taylor Muckerman: It's almost here, man!

Hill: All your shopping done?

Muckerman: Mostly, yes.

Hill: Congratulations! I'm working my way up to mostly.

Muckerman: I might have to make a few pit stops on the drive down to North Carolina, but we'll see.

Hill: We're going to do a little bit of a look back on 2017. But there is news, of course. We're going to start with the sad news from CSX, the railroad company. The CEO, Hunter Harrison, has died following complications from a recent illness. And just on Friday, CSX announced that Harrison was going to be taking a medical leave of absence, and Jim Foote, the Chief Operating Officer, was named acting CEO. I remember when we first talked about Hunter Harrison coming to CSX, and one of the things you had said was, he has this amazing track record in the industry, he is older, I believe he was 73 --

Muckerman: He was, yeah.

Hill: I didn't realize that he was ill.

Muckerman: They didn't really make it publicly known, because when CSX brought him on board, they had tried to make the stipulation that they wanted outside independent doctors to assess his health, but he put the kibosh on that and basically said, you're going to listen to my doctors or I'm not going to take the job. So, they chose to listen to his doctor, who apparently just wrote a two-sentence note saying he was fine and could lead the company. Unfortunately, passed prematurely, and he still had a few years left on the contract.

Hill: We saw shares of CSX just on Friday drop about 8% just on the news. It's basically stabilized today. But this really does seem to be one of those business leaders who was part of the thesis for investing in CSX, I suppose.

Muckerman: Oh, yeah, I think he was almost entirely the thesis. Before he was made the CEO, when he and the hedge fund that were trying to wiggle their way in, they announced they were going to challenge for a CEO spot and some board seats, the stock shot up about 25% in a single day, thus basically forcing the hand of CSX to bring him onboard, and now you're seeing the stock retreat as a result. He's come in and made dramatic changes already, but there's still a lot of work to be done. And now you just have to wonder if the folks that are still there that remain are capable of that, because he was trying to change the whole operating psychology there. And the way that they do business as a railroad, over toward the point to point vs. the hub model that they had used, they're trying to become a CN Rail or a Canadian Pacific, the two rails that he led to great success before CSX. Now they're kind of stuck right in the middle of that. Granted, Jim Foote worked at CN Rail with Hunter Harrison for a little over a decade. So, he has experience with what Hunter Harrison was trying to do. But now it's all on his shoulders.

Hill: So, if you are a shareholder of this company, do you sell your shares, or do you wait and see? And all of this is unfolding very quickly, so Jim Foote still has the word acting in front of his title. Listeners, go ahead and assume he is named the CEO of this company. Do you hold on to your shares?

Muckerman: I think you could certainly adopt the wait-and-see mindset with this. Although the company, even before Hunter Harrison stepped in, was seeing headwinds from the industries it services, most notably coal. They've seen coal revenues drop significantly over the last few years. Hunter Harrison blatantly said that fossil fuels are dead when he took the role, and said he didn't expect coal to be part of the company's revenue stream for much longer, certainly not in the next five to 10 years. But he did say that he wants CSX to ship the last railcar of coal on a U.S. railroad. So, you have to climb revenues in one of their previously biggest segments, and now this upheaval in the C-Suite. They lost their Chief Marketing Officer, who departed before Hunter Harrison came on, supposedly the heir apparent to the CEO role, and then that role has been vacated now. So, they have some holes to fill, not only in Hunter Harrison's shoes, but now a few levels below Jim Foote's. I'd adopt a wait-and-see mindset. Just listen to what Jim Foote has to say. They have an investor day coming in March. Maybe you'll learn something then and make a decision based on that.

Hill: To the surprise if absolutely no one, Star Wars: The Last Jedi came in No. 1 at the box office over the weekend, taking in $450 million around the world. Even with that, you look at the box office numbers here in the United States, this movie could put up these types of numbers for the next couple weekends and 2017 is still going to come in both behind 2016 and 2015, in terms of domestic box office in the U.S. Which is why the movie stocks, even on the heel of a weekend like this, you look at a movie theater stock AMC Holdings, they're just having a tough day.

Muckerman: Yeah. When you look at the box office sales, I'm not sure the exact percentage of that that the movie theaters actually retain, but I imagine it's much less of a percentage than what the filmmakers retain. They're really relying heavily on overpriced refreshments and snacks. And there's just so much competition out there for eyeballs and for your bottom dollar, especially during the holiday season. If you're going to go to a movie, maybe you just go to the movie. Maybe you just eat at home, or go out to eat before or after, and save your money that way. So, really struggling. You see some companies trying to do innovative things by hosting e-sports competitions and viewings like that. I think Cineplex in Canada is starting to introduce a Dave & Buster's style theme to some of their movie theaters, with some arcade games and things like that. But certainly, a struggling marketplace despite the success of some recent blockbuster hits.

Hill: It's going to be interesting to see if Disney, now that it's going to have another couple of studios under the umbrella with the recent acquisition of the Fox studios, it's going to be interesting to see if Disney continues to flex its muscles with theater operators the way that it did with The Last Jedi, where you saw these stories where Disney was essentially dictating higher terms to the movie theaters, saying, we want a four-week commitment that these are going to be in your theaters, and there's going to be a financial penalty if you pull it early, that sort of thing.

Muckerman: Content is king.

Hill: Yeah, it really does seem like that. Have you seen the movie?

Muckerman: I have not. But there were a few empty seats around The Fool on Friday. I'm thinking there were some people playing hooky. [laughs] 

Hill: Definitely. Fortune Magazine came out with their business leader of the year Jen-Hsun "Jensen" Huang, the co-founder and CEO of Nvidia. Who's your business leader of 2017?

Muckerman: That's a tough act to follow. We have a lot of big trends we're talking about here at The Fool with AI and automated driving and things like that, and blockchain, and Nvidia seems to be a part of all of that. I think my CEO of 2017, been a CEO, challenging for the CEO of the year in my mind for the last couple of years, but now you're really starting to see the success of John Chen and his success at BlackBerry. Delivered a few great quarters back to back now, beating analyst expectations, and really dramatically changed this company, removed it almost completely from hardware, and now it's a software and security business. I really think there's big things to come. He's made from wise acquisitions, and the balance sheet is super strong based on his careful calculations on how to run the business moving forward. It's a company that we view very highly right now at The Motley Fool in Canada.

Hill: And you look at shares of BlackBerry, up more than 60% year-to-date. It's just interesting that this is one of those companies that was soaring for years, and then just getting its butt kicked for years. And when you have a leader that can come in and truly change the business, it's a nice reminder that, with certain leaders, no business is dead.

Muckerman: Yeah, he's done this before with a couple of other companies, this turnaround strategy. Almost following the exact same playbook on a bigger scale with BlackBerry. Certainly, I would put the same weight on him as shareholders of CSX did with Hunter Harrison as his impact there for this company moving forward.

Hill: Before we wrap up, one of the things that I always enjoy is -- talking to you, talking to all of our analysts -- is getting a sense for what you're watching beyond your basic coverage, beyond your day to day responsibilities. With that in mind, what are a couple of under-the-radar stocks that, maybe you don't own shares of them, but they're on your watchlist?

Muckerman: It's an industry that makes people chuckle every now and then, and it's been wildly speculative up until this point, or maybe it still is a little bit, but it's cannabis and marijuana related stocks. Really hot stories up in Canada, but you don't really hear the names that often down in the United States, A, because they're traded over the counter for the most part, and B, because it's not legal here in the United States federally, whereas in Canada, by next July, it will be legal to anyone over 18. Each individual territory will be able to dictate the rules and regulations, but countrywide it will be legal. You're seeing a few deals, one of which we talked about a few weeks ago with Constellation Brands buying a 9.9% stake in Canopy Growth Corporation, which is the largest of the publicly traded cannabis companies in Canada. We actually had the CEO on Industry Focus a couple of weeks back with Kristine Harjes, so if anybody wants to tune into that interview you're more than welcome to. Then, Aphria, one of their competitors, signed a deal with Shoppers, which is the largest pharmaceutical chain in Canada, owned by Loblaw, a publicly traded company. So, you're starting to see other publicly traded companies dump money into this industry because they realize there's a good chance this is for real. And I think the United States is probably taking a wait-and-see attitude to see what happens in Canada, and if it works out, it could be a nice blueprint for us.

Hill: Aphria?

Muckerman: Yeah.

Hill: What's the ticker?

Muckerman: I'm not sure of the ticker in the United States. But, Aphria and Canopy Growth Corp are the two companies that I would look at out there. Still high-risk high-reward, but certainly a little bit more public adoption than we've seen over the last couple of years.

Hill: I'm glad you mentioned the interview that Kristine Harjes did, because there's a really good interview. Bruce Linton is the guy's name. We'll tweet that out, but it was late November that she did that interview. Definitely worth checking out. Taylor Muckerman, thanks so much for being here.

Muckerman: You got is, Chris, thank you. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

[Tom Waits -- Christmas Card from a Hooker in Minneapolis]