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 | Jan 20, 2012 | 6:30 AM EST  | Comments
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Certain industries are not for the faint-of-heart investor; the airline industry is one, and the restaurant industry is another. Although it is perhaps not quite as volatile as those examples, investing in the entertainment sector also requires a high degree of fortitude.

If you are in a position to take a flyer on a couple of risky plays, two entertainment-oriented stocks are worth your attention. One is a conventional Hollywood-type company, and the other is technology-oriented.

The Hollywood name is DreamWorks Animation SKG (DWA). Back in 1994, industry giants Steven Spielberg, Jeffrey Katzenberg and David Geffen founded DreamWorks Studios, which produced both live-action movies and animated features. In 2004, the animation division was spun off into the publicly traded DreamWorks Animation, with Katzenberg going with the new animation company as its CEO.

During its history as part of DreamWorks Studio and then as an independent company, DreamWorks Animation has created several franchises, including the immensely successful Shrek films, of which four have been made. The studio has said it will not create any additional Shrek movies. Other film franchises include Madagascar, Kung Fu Panda and How to Train Your Dragon.

The company's success has extended beyond these franchises. As a spinoff of the Shrek movies, the company released Puss in Boots in October 2011, which did a solid box office of $147 million domestic and an additional $334 million in foreign markets.

Yet, despite its impressive track record and numerous assets (for example, the Shrek series will continue to produce revenues for years from DVD sales, television licensing and the like), the company is facing increased competition from several studios that have jumped on the animation bandwagon and from other forms of entertainment. In addition, it is under pressure to come up with another blockbuster franchise like Shrek. In the last year, its stock has gone from a high above $30 to its current level of $17 or so. More than one analyst has said this is the time to sell DreamWorks Animation.

But that may be a good reason for you to buy it now. I use a computerized strategy I based on the writings of Peter Lynch to help me pick stocks to recommend, and it is lighting up -- not unlike one particularly famous ogre in love -- over DreamWorks Animation. The strategy emphasizes the P/E/G ratio, which is price-to-earnings ratio relative to growth, and by this measure, the company is animating a big "buy" sign. Its P/E is 9.96, while its growth rate is 33.82%, based on the average of the three, four- and five-year historical EPS growth rates. This produces a P/E/G of 0.29, which is very impressive. A P/E/G of 1.0 or less is acceptable and below 0.5 is great. In addition, the company has no debt, which is another big plus. An investment in DreamWorks Animation is certainly chancy, but its price has taken a deep ride down, its management has proven its ability to produce a number of successful films, not just one, and its financial position looks solid.

Dolby Laboratories (DLB) is another company with an entertainment focus, but with a technical pedigree. Years ago, Dolby established itself as the audio standard in movie theatres, DVDs and elsewhere, and this accomplishment continues to earn the company royalties. While it enjoys patent protection, some of those patents will expire in the next few years. Perhaps a more immediate challenge is that delivery mechanisms for entertainment are proliferating, such as the Internet, cable and satellite, making it difficult for Dolby to maintain its monopoly position. Plus, users are consuming entertainment on more device platforms than ever, including smart phones and tablet computers.

Yet, the company does have its patents, and switching from its technology to another can be expensive. Its strong brand name is also in its favor, and it has been reported that the company's products are gaining acceptance internationally.

Similar to DreamWorks Animation, Dolby's stock has been trading at the lower end of its price span during the past year. Its 52-week high was $62.50 and its low was $25.70, while it is currently trading in the low $30s. The Lynch strategy considers this a good time to buy Dolby. Dolby's P/E is 11.88 and its growth rate is 21.95%, based on the average of its three, four and five year historical EPS growth rates, which provides a favorable P/E/G of 0.54. And like DreamWorks Animation, Dolby has no debt. Given its favorable stock price and solid track record, this is a good time to sound out Dolby.

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