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With Media Leaders, You Get What You Pay For


Wall Street is in its quarterly slow news period but that hasn't stopped media stocks from rallying with the market.

The third month of each calendar quarter is always the time I catch up. There are just a few earnings reports to monitor and analyze, and for whatever reason general news flow is lower. So far, March feels the same. Fortunately, after a three-day dip early in the month, the stock market reversed and continued its steady climb higher. If I am going to be grinding away on catch-up tasks, I sure like it better when my quote monitors are flashing green!

Media stocks have done pretty well in the latest phase of the rally. Several are at new multi-year highs including CBS (CBS), Comcast (CMCSA), Discovery Communications (DISCA), Liberty Global (LBTYA), News Corporation (NWSA), and Liberty Media (LMCA). With the exception of John Malone's asset-driven Liberty Media, what each of those stocks has in common is industry-leading operating performance. In the case of cable and broadcast networks, you have ratings advertising growth leaders. For the cable system companies, you are looking at the highest organic growth rates in subscriber and financial metrics among peers.

The entire group of leaders has something in common: aggressive capital allocation programs that are returning cash to shareholders through share repurchases and dividends. These companies are not alone among peers in aggressively buying back shares, but when coupled with their superior operating performance, the investment story is too good for buyers to pass up.

I think it always pays to own leaders when investing. Sometimes the stocks look expensive, but with stocks, as in many things, you often get what you pay for. As a portfolio manager with broadly diversified portfolios, I use leaders as my core holdings, typically accounting for 80% of my investment capital. I surround those with more aggressive ideas where the reward is higher if my analysis is accurate but the loss is higher if I am wrong. Individual investors can construct a similar profile by buying some broad-based index funds and then buying a couple of individual stocks where a unique insight or investment thesis may exist.

As I mentioned, the news front has been slow of late. There has been a little action in the broadcasters dispute with Aereo. Aereo is distributing broadcast signals through a digital antenna in New York City and not paying retransmission fees. Also this week, we heard rumors that Intel (INTC) is going to offer a virtual cable experience by licensing channels from network owners and delivering them via a set-top box or PC. Similar to Aereo, the Intel venture would be all about giving consumers choice and enough programming to bypass cable and satellite operators.

I continue to think the fear about cord-cutting is overdone relative to the time horizon it is likely to play out. As I have often stated, the US remains a nation of couch potatoes. We want our TV simple, and that means nothing complicated like new boxes or new cable and wireless connections to our TV. Yes, today, many people under the age of 25 are going to consume TV far differently as they start their own households. However, that risk plays out over many years. In the meantime, an improving economy, and possibly in the near future a return to household formation, are keeping subscriber numbers at acceptable levels which is good for sentiment toward the stock and future financial results.

This column was previously published by SNL Kagan on
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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