Funds Rotate Out Of Comcast, News
DirecTV, Time Warner Cable, Viacom Gain In Q4 Shuffle
The mantra for media mutual funds in 2009 was rotation, rotation, rotation.
Some of the larger media-centric funds spent the last three months of 2009 selling large chunks of their holdings in such stalwarts as Comcast and News Corp., and focused their sights on companies like DirecTV, Time Warner Cable and Viacom, according to their year-end reports filed with the Securities and Exchange Commission.
Collins Stewart media analyst Tom Eagan had been predicting a rotation out of Comcast in favor of other stocks for months for one reason: its pursuit of NBC Universal. Now that Comcast's joint venture with General Electric for a controlling interest in NBCU is expected to be approved by year-end, some investors are looking elsewhere.
“We figured that although the company may be hedging its bets a little bit between the content and the distribution side, they may not be able to take advantage of that until 2011,” Eagan said. “Therefore, there would be a lit bit of a lag on the stock for the next six to 12 months. At the same time, we've seen appreciation in other cable stocks like Time Warner Cable and Cablevision.”
Time Warner Cable has gained favor since March when it split from former parent Time Warner Inc. The pure-play cable stock is a darling of several analysts for its strong free-cash-flow generation (about $1.9 billion in 2009) and its low debt (it is expected to reduce its leverage ratio to about 3.25 times cash flow in the first quarter).
Cablevision, which recently spun off its Madison Square Garden unit, has been an analyst favorite for several reasons, including high penetration rates for new services and consistent free-cash-flow growth.
Both companies had strong increases in their stock prices last year — Time Warner Cable shares gained 86% ($19.17) and Cablevision rose 49% ($8.44) in 2009. A few funds took advantage of those gains. Bank of New York Mellon, for example, grew its Time Warner Cable position from 618,680 shares at the beginning of the year, when the stock was trading at about $22.22, to more than 8.5 million shares by the end of the third quarter. In the fourth quarter, when the price had risen above $43, the fund sold 4.8 million shares.
According to year-end reports filed with the SEC, Comcast was the big sale for many mutual funds in the fourth quarter, with FMR Corp. — the parent of the Fidelity family of mutual funds — unloading the biggest block: 15.7 million shares of Comcast Class A and 5.8 million shares of Comcast special common stock, also known as “K” shares. Other big Comcast sellers included Capital Research Global Investors, the Los Angeles-based fund led by media legend Gordon Crawford; Janus Capital Management; and Dodge & Cox.
According to the SEC documents, Capital Research sold 7.4 million Comcast “K” shares and 3.7 million Comcast Class-A shares in the period; Janus, an early backer of Comcast, shed 6.5 million Class-A shares and Dodge & Cox unloaded about 1.8 million Comcast Class-A shares.
It should be noted that these funds still hold a huge amount of Comcast shares. For example, Dodge & Cox owned about 135.6 million shares of Comcast, Capital Research about 28 million “K” shares and 22 million “A” shares, and FMR about 44.5 million “K” shares and 13.3 million “A” shares as of Dec. 31.
Part of the reason for the rotation simply could be that Comcast stock was one of the poorer performers in the sector for the year — Comcast Class-A shares were down about 6% in 2009, while the entire MSO sector rose 42% — but rallied late in the year. Comcast Class A was as low as $13.95 in November when the NBCU speculation was high, but closed the year at $16.86.
“The reason why the stock was down was because people were selling,” Eagan said. “I think people were selling because they weren't quite sure of the near -to medium-term impact of the NBCU deal.”
Miller Tabak analyst David Joyce agreed that Comcast stock was pressured in October and November as speculation swirled about an NBCU deal.
Though the stock improved when the deal that was announced had terms favorable to Comcast, Joyce pointed out there is still a long way to go before the deal is approved.
“There will be a year of headlines before this deal is done, likely with conditions, so there is an overhang that has driven some investors to look elsewhere for more immediate returns, which would explain the selling,” Joyce said.
News Corp. also was on the “for sale” list for five of the seven funds examined.
Oppenheimer sold 6.3 million News Corp. shares; Bank of New York Mellon shed 10.1 million; Capital Research sold 6.3 million and Dodge & Cox dumped 26.7 million shares in the fourth quarter.
Profit-taking could have played a role: News Corp. shares, down 54% ($11.12) in 2008, rose 56% ($5.75) in 2009.
The Fox networks' parent also finished strong, rising about 20% ($2.63) in the fourth quarter.
Joyce said funds selling News Corp. might have traded into Viacom, which hadn't risen as much in the period but was beginning to see some upside from ratings and ad revenue growth from new shows.
Several funds beefed up their Viacom positions in the period, with Oppenheimer, Bank of New York, FMR and Janus all raising their holdings considerably.
Eagan said investors might merely have been switching horses in the retransmission-consent and cable-carriage race. News recently endured a high-profile battle with Time Warner Cable over retransmission consent — and attracted much higher fees as a result, according to some reports.
Many funds that sold News Corp. shares beefed up on The Walt Disney Co., which has both broadcast (ABC) and cable (ESPN) properties that are scheduled for renewal later this year.
“There is more immediate upside,” in those stocks, Eagan said.
On the buying side, funds appeared to load up heavily on DirecTV. Capital Research bought 16.6 million shares of the satellite giant in the quarter, while Bank of New York added 4.3 million, Janus added 4.8 million and Dodge & Cox added 4.9 million.
Another big target of buyers: Viacom. Oppenheimer added 3.6 million Viacom shares in the quarter, and others joined the party as well, including Bank of New York Mellon (1.1 million shares); FMR (5.3 million); and Janus (4.1 million).
Eagan said the shift toward DirecTV illustrates the satellite giant's strides in cash-flow growth as well as subscriber additions.
“That's not really in the stock price yet,” Eagan added. “People are looking for an entry point into the stock.”
