Stock picking ripe for a comeback

Investors seeking rare growth stories, firm-specific successes

Media investors might want to throw out last year's playbook.

Entertainment stocks enjoyed a broad-based run-up in 2009 amid signs of an economic bottom and a related trough in the ad market. The best performers, especially during the May-December frame, were stocks of companies with the biggest ad exposure (think CBS Corp.).

This year, stock picking might make a comeback as investors seek rare growth stories and company-specific successes that could push share prices higher while waiting for additional proof of an ad resurgence.

"Our outlook for media investing has progressed from a focus on higher levels of ad exposure to targeting company-specific trends that should provide sustainable upside," UBS analyst Michael Morris said in a recent report.

The year's first trading month saw most big media and entertainment stocks decline, including Disney, News Corp. and Time Warner. But such smaller players as DreamWorks Animation and Netflix set 52-week highs in January turned out to be a stock-picker's delight -- at least temporarily. For the month, DWA shares finished down 2.5% at $38.94 after a drop-off in recent days despite earlier enthusiasm about upgrades and confidence in its film slate. Netflix benefited from stellar earnings to rise 13% in January to $62.25.

Before Friday's news that fourth-quarter GDP growth of 5.7%, a second up quarter in a row that seemed to confirm the end of the U.S. recession, the year so far featured mixed economic data and wild market swings.

Conglomerate CEOs must hope the old adage "as goes January, so goes the year" will not come true this time around. That old saying isn't always true, but individual investors and pension plans traditionally do pour big chunks of cash into retirement accounts early in the year.

So, which sector stocks do analysts like now?

In line with his shift to picks that focus on company-specific success stories, Morris recently upgraded Scripps Networks to "buy" with a $52 price target and DreamWorks Animation to "buy" with a $50 target. He also likes Disney and Viacom, rating both a "buy" with price targets of $38 and $34, respectively.

Morris predicted that the impending fourth-quarter earnings season will prove his thesis that "a stronger ad environment is the consensus outlook and is reflected in shares," particularly given that ad visibility remains limited even though renewed ad enthusiasm could give sector stocks another boost in late spring ahead of the upfront season.

Barclays Capital analyst Anthony DiClemente is more bullish on the U.S. ad outlook, boosting his forecast a few days ago to a Wall Street high. But he also carefully picked his favorite stocks to ride the ad wave: Viacom, which he rates "overweight" with a $37 target, and News Corp., "equal-weight" with a $15 target. Both have "significant ad exposure where Street expectations are currently most conservative," he argued.

CBS has come out of favor given its strong performance last year, which many analysts have argued leaves little stock upside. But Jefferies & Co. analyst Brian Shipman still has upgraded CBS from "hold" to "buy," with a new $16 price target, up from $12.

"Advertising has gradually improved over the last couple of months running about 25% over upfront pricing, but more importantly visibility is returning to the marketplace," he said.

These days, no one seems willing to just pour money into a broad set of media stocks and surf the economic recovery wave like last year.