Should I invest in the media sector?
Media: A competitive, complex market ripe with investment opportunities (Part 14 of 16)
Media—a cyclical industry
Media and entertainment services are part of the consumer discretionary sector. These are cyclical services, which directionally follow the economic trend and expectations. They’re affected significantly by the troughs and peaks of business cycles.
Media and entertainment are not core necessary services that consumers require. During economic downturns, they usually underperform the market. However, in economic upswings, they often perform better than the overall market.
Economic expectations and consumer spending
Investors who want exposure to media sector stocks throughout the business cycle should watch for key domestic and global economic and consumer spending indicators. Consumer confidence is a crucial driver for sectors such as media. It gets bolstered by declining unemployment rates and rising disposable income levels.
Economic conditions and expectations also affect businesses’ advertising expenditures. Advertising constitutes a significant portion of media sector revenues throughout its value chain, from media networks to distributors.
As you can see in the above chart, advertising constituted almost half of Viacom’s (VIAB) fiscal 2014 revenues from media networks.
Look out for evolving media delivery models
Investors should keep an eye on traditional media companies with robust business models. But you should also keenly watch for service innovators in the segment. This is particularly important for investors who want to remain invested throughout the business cycle.
After the completion of the initial expansion in the business cycle, investors may experience declining returns due to the sector fundamentals we mentioned earlier.
Investors should look at key trends, especially in media companies’ evolving delivery models. Mobile and Internet solutions are increasingly delivering media content. This shifts a significant portion of revenues from traditional media distributors such as pay-TV providers Comcast (CMCSA), Time Warner Cable (TWC), and DirecTV (DTV) to new media distributors such as OTT (over-the-top) content players like Netflix (NFLX).
You can take a diversified exposure to these four media companies by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY). The ETF held ~11.5% in these companies as of March 2, 2015.
Browse this series on Market Realist:
