Media stocks join Wall Streets rough ride

Sun and blue skies in Southern Manhattan Friday, the last day of a stormy third quarter on Wall Street, failed to calm fears of another recession on the horizon. Major stock indexes slumped and the S&P 500 was down 13% for the quarter — its worst showing since the peak of the economic crisis in late 2008.

The big five showbiz stocks — Viacom, CBS, Time Warner, News Corp. and Disney — which have outperformed the overall market during the recent slowdown felt the pain as investors socked anything that smelled even vaguely of advertising. The punishment came despite aggressive stock buybacks, which investors love, and generally strong businesses.

“Clearly the Street is worried about a recession,” said Alan Gould, head of media research at Evercore Partners. He and others cite chaos in the Euro-zone and the perception of political gridlock and slowing growth Stateside — a double whammy that’s convulsed international markets for most of the summer and fall, and isn’t going away.

“Advertising has held up so far. But I guess for the first time, over the past few months, people have been asking me if the ad market is going to hold, and what it will mean for these companies,” Gould said.

“It’s a time of worry,” agreed fund manager Sal Muoio of S. Muoio & Co. — some of it overdone in his opinion, especially with regard to media stocks.

Market psychology feeds on itself. “People worry because people are worried,” he said.

As a result, some media stocks are trading like so-called cyclicals, which follow economic ups and downs, when they shouldn’t be, he said.

“Some are and some aren’t. They all trade on advertising in general. But to me, these are some of the most bulletproof businesses you can find.”

Big cable programmers like Time Warner and Viacom have multiple revenue streams. Smaller players like Discovery Communications saw revenue rise in 2008 and ’09 in the face of the massive economic slump. Even CBS Corp., the most exposed of the major congloms to advertising, has diversified its business to reduce exposure. It’s also the most watched broadcast network, and is having a kicker of a fall season. CBS stock on the whole outperformed peers in 2009 and into 2010.

Muoio sees bargains in the media space as stocks tumble.

The Eye fell 2.8% Friday to close at $20.38, but is down a whopping 28% from the end of June. Sister company Viacom dropped 4.9% on the day to $48.36, and is off 15% for the quarter. Disney, which eased 1.6% to $30.16, fell nearly 23% during the quarter. Time Warner lost 2.8% Friday, closing at $29.97, and fell nearly 17% on the quarter.

News Corp. dipped 2.8% for the day to $15.60, and fell about 13% for the third quarter. Ironically, News Corp. has held up the best of the group over the past three months despite a massive phone-tapping scandal in the U.K. that transfixed the media world for much of the summer and has put chairman-CEO Rupert Murdoch and his son James in an unflattering light.

The biggest casualty in the showbiz space by far was Netflix, which had its value chopped by more than half from $262 a share to about $113. It closed unchanged Friday at $113.27.

Part of the drop was likely a correction to its high-flying valuation. Then, splitting the company’s business in two between mail order and streaming has caused CEO Reed Hastings no end of grief, and another slide in the stock. “Reed Hastings hasn’t made too many mistakes,” Gould said.

But in this market, it’s best not to make any.

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