Media stocks trail at halftime

First-quarter ills ease just a bit as economy pummels THR Showbiz 50

It was a tough first half for big media and entertainment stocks as economic sluggishness, company-specific concerns and broader market declines — particularly pronounced in June — dragged down shares of all sector giants.

All conglomerates except for Viacom hit 52-week and other lows during the first quarter, while the second quarter saw News Corp., CBS Corp. and Sony tumble even farther.

Viacom also went into free-fall mode and hit lows during the second quarter, hurt by a cable network advertising revenue warning and concerns about a possible loss of its DreamWorks partnership. It leaves the stock as the biggest loser among sector giants at the half-year point.

Only 11 names on The Hollywood Reporter Showbiz 50 stock index finished first-half 2008 above their 2007 close, led by video game firm Take-Two Interactive, which Electronic Arts has been trying to buy. Its 39% gain is followed by Warner Music Group and Marvel (up 20% each) and DreamWorks Animation (up 17%).

These and a handful of other gainers helped the Showbiz 50 make up a bit of its 17.8% first-quarter decline to end June with a 15.2% deficit. That's still worse than the midyear 12.8% decline in the S&P 500, which was down 9.9% in the first quarter.

But most entertainment conglomerates are way off year-to-date, though Disney managed to do better than its peers (down 3%) as its theme parks have held up better than some had expected in a sluggish economy.

Many on Wall Street remain skeptical about the sector's near-term outlook, but some said a rebound in large entertainment stocks could start this year.

Concerns about the U.S. economy, the continuing credit crunch and rising prices for oil and other commodities "are sending investors away from consumer discretionary stocks" and ad-dependent stocks, Miller Tabak analyst David Joyce said.

Added Dennis Leibowitz, managing general partner at hedge fund Act II Partners, "The maturation of DVD and a projected soft third-quarter boxoffice because of (tough) comparisons are other reasons" for the malaise.

In mid-June, Citi chief U.S. stock market strategist Tobias Levkovich reduced his rating on media stocks from "overweight" to "market weight." His argument: The S&P media index outperformed the S&P 500 early this year, and "media has historically performed poorly during periods of soft consumer confidence." As a result, he sees more upside in transportation, insurance, pharmaceuticals and other industries.

Asked why a weak economy doesn't help entertainment stocks, which often are seen as recession-resistant, he said: "That's already built in to expectations. What you have to do is get beyond the expectations" to gain investors' confidence.

Hal Vogel, president of Vogel Capital Management, also is looking to make money outside of entertainment. "Favorable stocks are not in this sector. I'm trading elsewhere," he said.

The biggest loser on the Showbiz 50 year-to-date is cinema ad firm National CineMedia, which has struggled with near-term challenges. (partialdiff)