Stock shock

Showbiz 50 sinks 43%

The worst year for media and entertainment stocks in a long time is coming to an end today, and few expect a quick turnaround in 2009.

With one trading day left in 2008, only two of the 50 stocks in The Hollywood Reporter Showbiz 50 index — Marvel and Netflix — are set to finish the year with gains. In 2007, the index had more than a dozen in positive territory.

The shares of most Showbiz 50 components will end 2008 down in the double-digit percentage range amid a deepening global recession and the continued fallout from the financial crisis. Those and other concerns, such as slowing DVD sales and the continuing digital evolution, pushed THR's entertainment stock index to 584.61 this quarter — its lowest level since its launch in 2006. That's down 43% year-to-date through Tuesday. (The broad-based S&P 500 fell 39% during the same period.)

"Media/entertainment stocks are … not much better than the horrible financials," said longtime industry watcher Hal Vogel, president of Vogel Capital Management. "It has been the worst relative performance year for this group that I can remember. It largely debunks the theory that these industries do well in a recession."

In 2007, the Showbiz 50 rose 11.5%, beating the S&P 500 on strong gains of such new-media stocks as Apple, TiVo and Google.

Also as in 2007, shares of media conglomerates were among key losers, with all of them falling in 2008. Last year, though, Sony and Viacom had somewhat saved the group's reputation with advances of 27% and 7%, respectively.

Disney, while down, fared best this year among conglomerates. It was a Wall Street favorite in the entertainment industry until some analysts recently started calling the shares expensive compared to peers, especially given the company's 2009 outlook.

Disney being the most obvious exception, conglomerate stocks in 2008 hit new 52-week and — in many cases — historic lows, to the point where some now call them undervalued.

Nevertheless, the outlook remains clouded. Some point to a potential economic recovery later in the year and argue that media stocks could rebound early, while others warn that the global recession could last longer than anticipated.

Some analysts say 2008's dismal performance is a reason the sector could outperform in 2009.

"Lots of damage has already occurred," Vogel said. "However, this is relative performance — which means that on an absolute basis the share prices could still fall some more."

Some on Wall Street are recommending Time Warner and Comcast for 2009.

Credit Suisse analyst Spencer Wang recently explained his "outperform" rating on Comcast shares by saying he prefers the biggest player over others in a relatively recession-resistant sector.

As far as TW goes, it is less exposed to advertising revenue than its peers, and it will separate Time Warner Cable into an independent entity in the new year and will likely decide the future of AOL.

Meanwhile, a team of Barclays Capital media analysts recently cited Discovery Communications and Google as two of its best stock ideas for 2009. "We would continue to significantly underweight large-cap media and newspaper stocks and remain cautious on stocks with exposure to the broadcast television networks and the local broadcast station groups," they added.

Wedbush Morgan Securities analyst Michael Pachter recommends Activision Blizzard.

"Sentiment for consumer discretionary stocks is quite poor," Pachter said. "I am most confident that Activision rebounds by 50% during the year as its business consists of several predictable revenue streams, most prominently (massively multiplayer online role-playing game) 'World of Warcraft.' "

Investors also shouldn't overlook smaller and less widely covered stocks as the new year kicks off. Miller Tabak analyst David Joyce cites live events giant Live Nation and small cable operator Knology as his top picks, predicting both could gain 100%-plus due to a lack of competition and other factors. "But they may not truly revive until closer to the middle of the year, since larger caps tend to emerge from the recession first," he said.

Amid recent signs of a renewed weakening of the dollar, "Liberty Global is also among the top of the list," Joyce said. (partialdiff)