Most Big Entertainment Stocks Outperformed the Broader Stock Market in 2010

CBS Corp. and Viacom shares lead the conglomerate pack, while News Corp. lags its peers, and Netflix is the year’s biggest Hollywood gainer.

Going into the new year, several market prognosticators have highlighted that the third year of any presidential term tends to be good for stock markets. 

Given the gains of 2010, many media and entertainment experts on Wall Street cite capital returns to shareholders, smart digital plays and some continued improvement in underlying ad trends -- absolute ad revenue may in various cases be down due to the 2010 bump from political and Olympics expenditures -- as likely key drivers for sector stocks in the new year. 

“In general, we have a positive view of media and telecom heading into 2011, with particular bias for those companies best positioned to take advantage of the Internet revolution, as well as provide meaningful capital returns,” the Wells Fargo research team said in a recent report. “It appears widely accepted that we are in the midst of a slow and (un)steady recovery, but there is no longer talk of a double-dip recession, consumers are spending, and cars are selling. This leaves us hopefully for 2011, which should be a year in which investors focus more on fundamentals and less on the economic noise.”

The best media and entertainment performers of next year will be those offering shareholder payouts and avoiding business pains from the digital evolution, Miller Tabak analyst David Joyce echoed. “We expect the media stocks with catalysts demonstrating shareholder-friendly moves, and an ability to remain competitive in the face of, and leveraging, the rapidly-evolving digital landscape, to have the best performance in 2011,” he said.

Indeed, a range of Wall Street analysts have made their stock picks for the new year. CBS, cable giant Comcast, which has shown signs of life as of late and could benefit from closing its NBC Universal acquisition in the new year and removing the related stock overhang -- and Cablevision, which analysts like as a bet on strong cable operations and a company that has started to become more shareholder-friendly, are among the stock picks mentioned by more than one of the analysts who were reached or whose reports were reviewed by The Hollywood Reporter, but other names also get mentioned. 

Why do some observers still like CBS despite its outperformance in 2010? Bank of America Merrill Lynch analyst Jessica Reif Cohen recently upgraded the stock from “neutral” to “buy.” “At current levels, we believe CBS risk/reward is skewed positive (upside potential is 3.1 times downside risk), representing a compelling entry point ahead of an improving earnings mix in 2011,” she wrote. “We are bullish on CBS fundamentals due to strong advertising scatter trends, industry-leading television ratings, improved cost structures and growing subscription-based revenue streams.”

Wells Fargo’s Marci Ryvicker also recently wrote that “CBS remains our top pick as we enter 2011 given its exposure to large, national markets (which we believe will continue to outperform local, small markets in both the broadcast television and radio segments) and its dominant network, which continues to attract the greatest number of viewers in all demographics except for 18-34."

Nomura Securities analyst Michael Nathanson has “buy” ratings on Disney, Viacom, CBS and News Corp., but expects the most 2011 upside in the latter two. 

Viacom has also received some analyst love as of late amid continuing advertising improvements.

And Barclays Capital analyst Anthony DiClemente has picked Disney as his favorite entertainment stock for the new year. He likes its “high quality asset portfolio. “A best-in-class management team and favorable return of capital policy further enhance the equity story,” he said. “We also anticipate filmed entertainment to outperform, driven by a strong release slate in 2011.”


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