What's Gone Wrong for Media Stocks?
A "dead cat bounce" was predicted, given that the same negative issues that sent stocks reeling Monday and last week are still dogging the markets.
A powerful rally on Wall Street that included media and entertainment stocks — a rarity of late — fizzled by the end of trading Tuesday, a development that likely caught close to zero serious investors off guard given the volatility of stock-trading in recent weeks.
Some, in fact, predicted that a dead cat bounce was due, given that the same negative issues that sent stocks reeling Monday and last week are still dogging the markets, including evidence of slower growth in China and fear that interest rates in the U.S. and elsewhere must eventually rise.
The term "dead cat bounce" refers to a stock market rally in the midst of a market downturn — buyers scoop up what seem like bargains, then the buying dries up and the selling resumes. Monday’s big sell-off knocked the S&P 500 officially into “correction” territory, meaning the index is 10 percent off of recent highs, and Tuesday’s rally that turned negative just before the closing bell solidifies the thesis.
Jim Cramer, whose job is to recommend stocks on CNBC, appeared very cautious Monday night even when suggesting that Verizon Communications and Netflix might be worth purchasing, the former because of a 5 percent dividend yield and the latter because it is a growth stock with no exposure to China.
Prior to the recommendation, he warned: “I am not saying the market’s going higher, I am saying that we don’t know when it’s going to bottom.”
Steve Birenberg of Northlake Capital Markets told The Hollywood Reporter he doesn’t expect a sharp, V-shaped recovery, especially for media stocks, which have been in the doghouse since Aug. 4 when Walt Disney warned of slower growth at its cable networks as competition from Netflix and other subscription VOD services heats up.
“Violent moves like this in stock prices take time to repair. It is just natural that it is hard to wade back in after such a shock,” Birenberg said.
Birenberg predicts the market for media stocks won’t recover until sometime in October, providing that some positive news emerges, such as: better economic reports from China, the U.S. and Europe; a few quarters of no notable acceleration of “cord-cutting”; and evidence that strength in advertising scatter markets will hold up long-term.
“The fundamental issues are real enough for the markets and media that we need some fresh news to rebuild confidence,” Birenberg said. “The August, 2011 market collapse is probably the best reference point. It took a good six weeks to really bottom and stabilize. Only a week into this, but it feels similar.”
Birenberg, though, is actually more bullish on media and entertainment stocks than are some others, such as Bernstein Research analyst Todd Juenger, who wrote Tuesday of a “Big Shift” in U.S. media because of the popularity of Internet advertising and SVOD platforms. “Massive, unfavorable change” is headed for the business of ad-supported TV, he said.
“There is evidence that video entertainment options outside the traditional pay TV bundle are getting so good that cord-cutting may be accelerating, thereby jeopardizing affiliate fees, the core revenue driver providing baseline stability and growth to these businesses,” Juenger wrote Tuesday.
“This confluence of forces has caused us to adopt a whole new approach to valuing these companies, applying much greater risk to the TV businesses," wrote Juenger. "The company most hurt by these forces, by far, is Viacom, which we rate ‘underperform.’”
Indeed, since Aug. 4, no media-entertainment conglomerate has fallen harder than Viacom. Here’s the carnage since that day:
Viacom: down 31 percent.
21st Century Fox: down 22 percent.
Disney: down 21 percent.
Time Warner: down 20 percent.
CBS: down 18 percent.
Comcast: down 14 percent.
Sony: 13 percent.
Even Netflix, which is supposed to be the prime beneficiary of the move by consumers to SVOD, is off since Aug. 4, to the tune of 16 percent.
There was at least one prominent investor who was defending some media stocks on Tuesday: entrepreneur and Shark Tank star Mark Cuban, who took to Cyber Dust, a social-media company in which he invests, to say he was holding on to his Netflix shares and that he recently bought options in Facebook, essentially placing a bet that the stock will go higher soon.
“The stock market is hard,” Cuban wrote while placing the blame for the recent downturn on China.
“When things go good it's really good and everyone looks smart," Cuban wrote. "When they go bad, those people have to pay those debts because prices fall and things get really bad. Now imagine if the 2nd largest economy in the world was in the same position. Then realize that economy is run by a Communist party that is new to all this."