With media stocks, especially those of programming companies, in turmoil lately as investors worry about massive declines in ratings, advertising revenue and overall relevance, Sanford Bernstein media analyst Todd Juenger in a recent note to clients touched on a concept that I think sums up perfectly what has been a topsy-turvy time in the industry.
Juenger cleverly calls it the “wise guy trade,” but at its heart it is a breaking away from investing in fundamentals and instead focusing on whom you think may be a buyer or seller. That philosophy, which has made some investors buckets of cash over the past few years, separates a stock’s price from its business fundamentals and creates what I think could be a scary situation in the future.
Juenger uses 21st Century Fox as an example, adding that under the wise guy approach investors see the stock as undesirable because in practically every M&A scenario it is a buyer, not a seller. Every good M&A investor knows that you sell the buyer and buy the seller, even if, as is the case with Fox, it has industry leading growth and a depressed valuation.
On the opposite side is Viacom, which some investors, according to Juenger, see as having such dismal business propositions, that something has to happen (perhaps a takeover bid by another large programmer) and is therefore a “buy.” Juenger has been a critic of Viacom in the past – and in his most recent note he pointed to the company’s challenged structural position, earnings estimates that he believes are too high and the possibility that recent drops by distributors could lead to a meaningful loss of subscribers.
"In such an upside-down world, having the better-positioned business is a problem, not a virtue,” Juenger wrote.
Now there are plenty of examples where the wise guy approach works, most particularly Time Warner Cable. Before Charter or Comcast ever made a bid for the company (Comcast won with a deal valued at $67 billion) and TWC was insisting that it would remain independent, investors bought the stock hoping for declining fundamentals, which they believed increased the possibility that TWC would sell. They were right – TWC continued to post disappointing results, and its stock rose with every bad report. As a result, TWC stock rose from about $99 per share in May 2013 to $146 per share on Feb. 14, 2014, the day Comcast announced its offer. The stock was trading at $158.20 on April 16, up about 1% so far this year.
But Juenger urged caution, despite the TWC example, because buyers could take a decidedly different approach.
“Maybe instead of the winners acquiring the losers, the winners will just let the losers die on the vine,” Juenger wrote. “Or at least wither away for many years, getting weaker and weaker (and the stocks going lower and lower) before bailing them out with a rescue acquisition at a fraction of today's price that actually does create more value than it costs. That would not be good for the wise guy trade (at least, not yet. Too early.)”
That’s exactly what Juenger believes will happen and why he thinks fundamentals will be more important than ever to stock valuations going forward.
“Even if one of the so-called winners wanted to acquire one of the so-called losers, we very much believe they would wait,” he wrote. “The winners think their stocks are going up and the losers are going down.”
So what does that mean? To me it means that eventually the market will come around to rewarding companies that actually grow their businesses, that find a way to capture and monetize viewers that are watching their content on multiple devices and continue to offer content (including sports) that keep consumers riveted. Easier said than done, but better than just waiting it out for bigger companies to gather low-hanging (and sometimes rotting) fruit.
