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Most Big Entertainment Stocks Outperformed the Broader Stock Market in 2010

NEW YORK -- Amid an economic and advertising recovery, 2010 was a good year for most big media and entertainment stocks, whose gains in most cases were in the double-digit percentage range and often outperformed the broad-based S&P 500 stock index. 

That was particularly true for shares of CBS Corp. Their more than 35% gain to $19.05 as of Friday’s close to the year exceeded the growth of its big-media peers and brought the shares close to their 52-week high of $19.65. Including dividends, the return for CBS shareholders was even higher. 

A close second among entertainment conglomerates: Viacom with a stock gain of 33% in 2010. Advertising improvements at both Sumner Redstone-controlled companies along with CBS’ focus on developing new revenue streams, such as retransmission consent payments, helped boost the companies’ fortunes.

Other sector biggies can also look back at a year of stock gains. Sony Corp. shares jumped 23% in 2010, Walt Disney’s stock saw a 16% boost, and Time Warner’s stock rose more than 10%. News Corp. was the weakest big entertainment performer of 2010 as its stock eked out only a 3.1% gain. 

Disney remained the entertainment giant with the largest market value at the end of 2010 with $71 billion, according to Bloomberg data, followed by News Corp., Sony Corp. and Time Warner, which all finished the year in the $35 billion-$40 billion range.

The 2010 stock performance of all those entertainment biggies were easily trumped, though, by the 219% gain in shares of Netflix, which attracted investor interest and confidence with its transformation into a key online video player that has in some cases led to concerns among the entertainment establishment. The red-hot stock at one point even exceeded $209 during the past year and ended 2010 at $175.70.

The low-trading Sirius XM Radio and John Malone’s Liberty Capital were also big 2010 winners with stock gains of 172% and 166%, respectively. 

The weakest 2010 stock performers among major Hollywood names as of Thursday were DreamWorks Animation, which has lost 26% of its value since the end of 2009 amid some box-office results that were weaker than Wall Street had hoped, and video rental firm Blockbuster, which had to file for a bankruptcy restructuring amid continued sluggishness of its business and has remained a penny stock. In sharp contrast to competitor Netflix, Blockbuster's class A shares declined 76%, and its class B shares fell 88% in 2010. 

Internet giant Google had a rare down year for its stock, which fell 4.2% in 2010.

But fellow tech giant Apple became the second-most valuable U.S. company behind Exxon Mobil this year by overtaking Microsoft, and its rose more than 50% in 2010. As of Friday’s market close, Apple’s market capitalization stood at $295.9 billion, compared to Exxon’s $368.7 billion and Microsoft’s $238.8 billion. 

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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.”