Shares of Dreamworks Animation (NYSE:DWA) moved lower Thursday amid concerns over a new lawsuit filed against the company's officers by Abbey Gardy, LLP. The claim, which was filed in Los Angeles federal court, alleges that DreamWorks CEO Jeffrey Katzenberg and board Chairman Roger Enrico failed to disclose in the first quarter that sales of "Shrek 2" DVDs were declining far more than expected. The suit also says DreamWorks continued to ship the title "far in excess of the actual demand" and hid the fact that retailers were returning "massive amounts" of unsold DVDs.
A spokesperson from the company said the claims were "baseless" but the damage has already been done and considering the recent mediocre debut of "Madagascar," the timing couldn't be worse for DWA investors. Although the brief rebound on Wednesday seemed to establish a new base (near $30) for the stock, today's activity suggests the downtrend is intact and the probability of a lateral pattern emerging in the coming weeks appears somewhat remote.
With more than two weeks remaining in the June expiration period, we hesitate to make an "official" trade recommendation (for the adjusted position) at this time. However, some readers may want to sell the JUL-$35 calls (as mentioned in the 5/31 Blog) before the "premium" declines further. The current bid for the options (DWA-GG) is $0.30, thus an initial target of $0.35 - $0.40 is appropriate as there will likely be some near-term volatility in the issue. We will continue to monitor DWA on a regular basis and post any worthy observations regarding the technical character of the issue.