×

Why you should stay away from this possible deal

It's the hottest deal talk in the market right now but could DreamWorks' latest pop be a reason to bail out of the stock?

According to published reports, DreamWorks is said to be in talks with Japanese mobile and Internet giant SoftBank to be acquired for $3.4 billion or $32 per share. However, CNBC's David Faber reports that there is "not much going on" in the negotiations. DreamWorks closed Monday at $28.18 per share, up 26 percent from Friday.

However, one analyst who covers DreamWorks is not a buyer of the stock.

"On a fundamental basis, I've got a $20 price target for DreamWorks," said Barton Crockett, senior analyst at FBR Capital Markets. "I'm not a buyer of this pop on deal talk."

Crockett describes DreamWorks earnings as "lumpy" because of inconsistencies in whether or not its movies are hits. "They've got some good movies a couple of years out and they've had a couple of bad movies recently," he said. "It's just very lumpy and I think hard to really get comfortable with the valuation here on a normalized basis."

Quarter

Net Income

Q3 2013

+$10.1 billion

Q4 2013

+$17.2 billion

Q1 2014

-$42.9 billion

Q2 2014

-$15.4 billion

The last two quarters have been particularly hard for DreamWorks shareholders because of several disappointing releases. Until Monday, shares in the animation company were down 37 percent on a year-to-date basis.

Thus despite the bounce, Crockett is skeptical of DreamWorks stock. "If the takeout report has anything underneath it, we're pretty close to the price that was reported," he said. "You've got fundamentals where I think most people would have a hard time kind of justifying it here. So I have a hard time chasing it at these levels."

Ari Wald, head of technical analysis at Oppenheimer & Co., thinks DreamWorks investors should sell their shares and take the money and run.

"The technicals would support that fundamental story," Wald said. "The trend suggests to take profit right here."

Wald thinks investors should get out because he doesn't see long-term momentum in the stock. "DreamWorks doesn't have that," he said. "What DreamWorks has is a lot of resistance around $28. That was its June peak."

On top of that, DreamWorks' stock's 200-day moving average is sloping downward, which Wald sees as another bearish signal. "I'm expecting to see some sellers here," he said. "I don't think we make it all the way back to the lows from the summer but $24 seems like an important support level. I think we work back there. Overall, unfavorable risk/reward. I'm a seller."

To see the full discussion on DreamWorks, with Crockett on the fundamentals and Wald on the technicals, watch the above video.

-----
Follow us on Twitter: @CNBCNumbers
Like us on Facebook: facebook.com/CNBCNumbers