What is the Future for HMV Shares?

I had high hopes for HMV shares. In my current role as a boring value Investor, (which seems like the only safe strategy at the moment) HMV did look like a good, "contrarian", high-yield bet. But HMV is turning into a "Value Trap": a share that looks too good to be true which just gets cheaper and cheaper. With a PE ratio of less than 2 and yield of about 40% what could go wrong?

HMV was a profitable company with a shrinking business as ever more of its customers buy music as downloaded MP3s straight to their Smartphones or buy CDs, DVDs and Blu-Rays from Amazon or Sainsbury. HMV is the last UK High Street music store, as all the others gave up to the online competition. "Everyone" knows they can't survive, but I thought the perceived gloom was overdone, especially given the profitable and popular bookseller, Waterstone's also belonging to HMV. With a few shop closures, more emphasis on their online exposure and a radical re-brand of the remaining HMV shops to appeal to those who want to browse music on the High Street. Unfortunately even Waterstones business is vulnerable to downloaded books to read on the Amazon Kindles, Smartphones or iPads.

HMV had a very bad Christmas, with poor sales (down about 10%) partly due to the unusually heavy snow. They have made profit warnings and perhaps more importantly announced that they will be unable to meet some terms of their bank loans. They have a market capitalization significantly smaller than their outstanding debt (approximately £70 million and £240 million respectively, at time of writing). They will close 60 of their 285 HMV and 312 Waterstone's shops.

I bought HMV shares last year as a value investment, sold fairly quickly after a big rise in the price and a profit I couldn't resist, then bought again at an even lower price, repeating the process a couple more times and even getting a reasonable dividend. I thought I had become a genius trader (despite my original intention of this being a value investment) I still hold my last purchase of a few thousand shares at a significant loss that would wipe out my previous gains if I sold now, but I am going to hold in the hope HMV comes up with some sort of clever strategy.

HMV will disappear from the High Street unless something is done. People like to browse through music titles and touch real tangible, physical objects rather than digital downloads. They also make far better presents, so there must be some business for a few years to come, but HMV needs to find a reason for people to want to continue coming to their shops: A trendy music orientated coffee shop for teenagers to hang out, perhaps, or alternatively concentrate more on vinyl, the music format that just refuses to die and really is best purchased from a shop or maybe a more grown-up atmosphere for classical music lovers, who haven't yet moved to downloaded (generally lower quality) music. Unfortunately it would be impossible to suit all of these customers. The teenagers don't want to hang out with old people (and vice versa)

The Waterstone's bookshop chain will probably still have to be sold to help pay the bills, assuming they can get a good price for it. Alternatively there could be a rights issue (more shares created and sold to investors to raise more cash) but the existing shares would be diluted so much, due to the low valuation of the company, that this may not be viable, but I think there is hope for HMV's survival, if a suitable rescue package can be devised, even if it didn't turn out to be the great value investment I had hoped for.

I won't be buying any more HMV shares, even at 15p each, but I also won't sell the few I have.

Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.