Each week, the group of traders on Fast Money select a small cap stock that they think has the potential to really take off in the near term.  With the mid-week release of what is poised to be a major box office smash, Transformers 2, this week’s pick was in the movie business.

“Let’s get to our rising star. Each week “Fast Money” picks a small cap stock that might be poised to break out. This week Dr. J brings up a movie related name. John, what is it?

Imax, this stock performs like crazy now because they finally have enough penetration that they can get folks into the theaters. Look at a thing like Transformers a big release today…

For instance, with “Watchmen,” it was not a huge success. It had a pop over the weekend, but then it pulled back pretty badly, the marvel comics presentation. Anyway, the issue here with Imax is they only have about 2% of the theaters but they account for about 10% of the money brought in on the big weekends, and the longevity of the people that want to go see it and the Imax experience, I think that’s the big selling point here. That’s why they’re doing so well and with two hot movies coming at them in real fast, rapid succession, Transformers then followed up two weeks later by Harry Potter…” CNBC’s Fast Money 6/24/2009

The point about Imax (IMAX) is that they really benefit from the blockbuster releases that get the fans excited.  The reason being, if the movie franchise’s fan base is pumped about an  upcoming release, it is logical that they may want to seek out an Imax theatre to see it on the highest quality screen.  The numbers seem to back this logic up as Imax sees a surge on major release weekends, even more than a regular movie theatre.

Summer has always been one high time in the movie release cycle, so Imax should benefit from the devoted fans of action flicks like Transformers and the ultra successful Harry Potter franchise.  Other major movie releases could help Imax, but there are clearly the two with the most hype and will likely have the biggest impact on Imax’s quarter.

The traders on Fast Money normally have a far different time horizon than we do at Ockham Research.  Imax stock could certainly do very well in the next couple of weeks with movies being a popular topic of conversation in the lazy summer months.  However, when utilizing our longer term valuation methodology, we see Imax as Overvalued.  The stock hit a seven year low in December, at which point we thought that it was a good buy.  Since that point the stock has just about tripled and can no longer be  considered for a deep value, fundamental investor, as earnings are have been improving but were still negative in the last quarter.  To break even would exceed earnings expectations for the current quarter.  There is certainly growth potential in Imax, but this seems to be more of a pick for the “Fast Money” type trader than a long term value investor because the fundamentals have a lot of work to catch up to the recent appreciation.

To read more on the Imax discussion or anything else that was talked about on “Fast Money” check out our recap page.  Also, all stocks mentioned on the show are listed in the chart for your convenience.