Media, entertainment stocks gaining weight

Scripps Networks, Viacom, News Corp named top picks

NEW YORK -- Big media and entertainment stocks have outperformed the broader market and run up so much amid signs of an advertising recovery, that investors must more carefully pick winning stocks going forward.

That is one of the key themes of the latest Entertainment Stock Scorecard published early Thursday by Barclays Capital analyst Anthony DiClemente who named Scripps Networks, Viacom and News Corp. his three top sector picks right now.

They are followed by Walt Disney, Discovery Communications, CBS Corp. and Time Warner. The analyst rates the two top-ranked names and Disney "overweight," with the rest carrying "equal weight" ratings.

Scripps made the biggest move compared to the previous report, which was published six months ago and ranked it the sixth most attractive entertainment stock. Disney topped the previous media stocks hit list, followed by Viacom, Discovery Communications, CBS and News Corp.

"Since then, media has materially outperformed the market, with media's sector outperformance having led to modest...valuation multiple premiums to both the S&P 500 and the consumer discretionary group," said DiClemente, who also pointed to a slowdown in upward earnings revisions. "At this juncture, it would appear that media is more fairly valued, as the merits for ownership have been more adequately reflected in stock prices."

The analyst continues to rate the overall sector at "neutral."

"While it was easier to simply buy the sector six to 12 months ago, media investing from here is likely to become a more delicate stock-picker's game," he concluded.

Media and entertainment stocks continue to benefit from the U.S. ad recovery, expected margin expansion due to that recovery and strong balance sheets that will enable companies to return capital to shareholders, DiClemente acknowledged.

But he highlighted that valuations are "less compelling," with only Viacom trading at a slight discount to its three-year price/earnings average.

DiClemente's top rating for Scripps Networks is based on his expectation that it "should deliver the fastest 2010/2011 growth in the sector." Plus, it has ratings momentum and room for international expansion.