Activist Track: Must-See Movie House

Watershed Capital filed a 13D filing last week stating that it had accumulated 5.2% of Carmike Cinemas (CKEC - commentary - Cramer's Take), a small-cap cinema operator that was also featured in The Wall Street Journal.

Interestingly, before Watershed's filing, Fine Capital Partners filed its own 13D filing stating that it owned more than 5% of the company at a price of $22.75. Watershed's shares were accumulated at $22.70. I'll review the activist recommendations below, but I believe the stock, sitting here at $22.25 and below the activists' purchase levels, could easily rebound to $30 or higher.

Carmike's chain of movie theaters serve a particular niche: All of its theaters are in rural locations. From the 10-K: "As of December 31, 2004, they owned, operated or had an interest in 282 theaters with 2,188 screens located in 36 states, making us the second largest exhibitor in the country by number of theaters and the fourth largest by number of screens."

The company owns 68 of these theaters, leases 212 of these theaters and operates an additional two under shared ownership. Of its 282 theaters, 243 show films on a first-run basis, and 39 are discount movie houses.

Carmike's unique business model is behind its attraction to activists. The company focuses on markets in communities of 100,000 people or less, and I believe this is critical to the company's success. There is less competition in these markets; it is not worth Loews' (LTR - commentary - Cramer's Take) effort to enter such a small market. These markets also enable Carmike to operate at a lower cost: It estimates that 47% of its hourly employees work for the federal minimum wage. Also, in these markets there are fewer alternative entertainment opportunities; going to the movies in the heart of Alabama is still the talk of the town. Plus, it has more than $550 million in property and equipment.

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James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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