Investors have suddenly tuned in to signals that mainstream American consumers are sweating the start of 2013.
Wal-Mart Stores Inc.’s (WMT) weak fourth-quarter sales and leaked insider emails about a rough start to February have helped to amplify concerns that the restoration of the 2% payroll tax Jan. 1, delayed tax refunds and steadily climbing fuel prices have stressed household spending. Darden Restaurants Inc. (DRI), parent of Red Lobster and Olive Garden, Friday blamed these factors for soft customer volumes. Abercrombie & Fitch Co. (ANF) and Nordstrom Inc. (JWN) chimed in with tempered outlooks for coming quarters, as well. Most of these companies’ shares have been clipped as the market adjusts to a more sober consumer theme.
The logical reflex impulse now would be to further sell stocks at direct risk of experiencing this apparent consumer fatigue - the chain retailers and casual-restaurant operators. These have indeed underperformed the market in recent days. Yet, another big chunk of the consumer sector – media and entertainment stocks – could well experience a pronounced setback after a year of powerful outperformance.
About a third of the Standard & Poor’s 500 index's consumer-discretionary sector is made up of media, entertainment andadvertising stocks. The consumer-discretionary group as a whole represents the largest single overweighted area by hedge funds now, implying the fast money has been riding the shares hard.
The sector, as measured by the PowerShares Dynamic Media ETF (PBS) has appreciated at almost twice the rate as the overall market in the last six and 12 months. As noted during a Friday CNBC segment, in a market pullback phase they would likely suffer more than the benchmark.
The pay-television companies sit on the front lines where media meet the consumer wallet, These stocks have already cracked. Time Warner Cable (TWC) is down 15% since a poor profit report in late January, and DirecTV (DTV) and Cablevision Systems Inc. (CVC) have badly lagged, too. Subscriber losses remain an overhang here (albeit a well-known one).
The broader content providers are more insulated from direct consumer issues, but some appear ripe to underperform for a while, given how stretched the stocks have gotten above their long-term ranges. Technical analysts such as Katie Stocktom of MKM Partners are leery of names such as CBS Corp. (CBS), a stellar performer that will be hard-pressed to continue rewarding investors given how far above trend its price has gone.
Specialty-cable network stocks are understandably coveted as pure plays on televised programming and the ad cycle, and offer the constant prospect they can be acquired at a premium. But the favorites - Discovery Communications Inc. (DISCA), Starz (STRZA) and AMC Networks Inc. (AMCX) are already valued at heady multiples of their cash flow, and the stocks are ripe for aggressive profit-taking.
Of the big media conglomerates, Walt Disney Co. (DIS) has probably the most enviable content assets, and its shares appear the least extended and vulnerable. But it’s worth noting that the recent deal under which Comcast Corp. (CMCSA) will acquire the remaining 49% of NBC Universal from General Electric Co. (GE) valued NBCU at a cash flow multiple that suggests the other media giants, such as Time Warner Inc. (TWX), are rather fully valued.
This doesn’t amount to a long-term bear case on the media business. The leading companies in the industry are now well managed, are well on the way to figuring out how to get paid in the digital/on-demand world and are far more prudent allocators of capital than used to be the rule in the media game.
Sure, there are persistent worries that the Netflix Inc. (NFLX) threat – in which content is created and sold outside the pay-TV bundle or box office channel – will grow. But none of these changes are sneaking up on the big guys, who continue to enjoy a lead in sourcing, developing and distributing diverting content.
The immediate issue for investors is not that hordes of viewers will rush to “cut the chord” on their cable package, but that the stocks are a bit too well-loved and at risk of aggressive investors pulling the rip-chord on more consumer-linked investments before long.
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