Omicron Creates Trades and Traps Among Media Stocks

Omicron Creates Trades and Traps Among
Yinchen Niu/VIP+

Just when the world thought the COVID-19 pandemic was mostly in the rearview mirror, yet another variant is threatening to upend the recovery. Despite the looming threat, there could be investment opportunities in the media space. 

But buyers beware: Not all buying opportunities are created equal. 

The omicron variant news spooked investors and sent the markets into a frenzy. The S&P 500 sank 2.3% on Black Friday and have yet to recoup those losses. Stocks are still down and off about 4% from the record highs the market hit earlier this year. 

Many are viewing the recent stock-market decline as a buying opportunity for those who missed out on the recovery rally of late. However, just because some media stocks look cheaper than others, doesn’t mean they’re all the best long-term bets.  

For instance, movie theater chains have gotten hit particularly hard over the past week. AMC Entertainment plunged a jaw-dropping 25%, while IMAX slumped 7% and Cinemark fell 4.5%. 

Those declines added to previous losses for the movie theater companies. Over the past six months, AMC sank 44%, Cinemark tumbled 33%, and IMAX was down 23%.  

But while that may look enticing for some investors looking to jump in while the stocks appear cheap, this could be the setup of a classic value trap. 

Omicron is sparking renewed hesitancy among consumers to visit movie theaters. According to Morning Consult’s weekly survey data, after the omicron news hit, consumer comfort with going to movie theaters fell 3 percentage points, to 47%. This comes ahead of the key holiday peak season for theaters. 

Movie theater stocks have been struggling for a while, as entertainment consumption shifted toward streaming over the past couple years. That trend will likely continue, which makes betting difficult on a group with so much uncertainty ahead. 

Still, that doesn’t mean there aren’t opportunities to buy media stocks on the dip. The growth in the media industry has been coming from the streaming space. Companies with a defined position in the streaming wars, such as Netflix, Disney and Roku, might be stocks investors could consider buying if they want to capitalize on the recent market drawdown. 

Netflix is still the dominant force in streaming, and the stock was reflecting that up until recently. Shares of the company were up 15% this year and 21% over the past year. Netflix stock hit all-time highs of $700 per share and crossed $1 trillion in market cap following its blockbuster Q3 earnings results.  

But the stock took a big hit over the past week or so and is about 14%, or almost $100, from its recent highs. At just about $600 per share, some would argue it was time to jump in. 

Meanwhile, Disney has had its fair share of challenges due to the pandemic, most recently a slowdown in streaming service Disney+. The stock has been under pressure this year, and the omicron variant is definitely not helping. Shares of Disney fell 14% over the past month and sunk 18% so far this year.  

Many still believe in Disney’s strong brand and treasure trove of valuable content and IP, and the future still looks bright even as temporary COVID-related challenges persist in the near term.  

Finally, another streaming player that has been pummeled lately is Roku. While it’s not a content powerhouse like Disney and Netflix, it’s still a major piece of the streaming puzzle.  

COVID and supply-chain woes have hit the company hard this year, and its stock has felt the pain. After a banner 2020, when the stock gained 150%, Roku stock has had a tumultuous 2021. Shares plunged 35%, and they've had a hard time regaining old highs. Roku is currently about 59% off =its all-time high of $490 per share. 

Whichever way you look at it, the omicron variant isn’t great news. The fear of another wave of deaths and infections doesn’t necessarily invoke confidence in the global recovery, but there isn't enough evidence to assess the full potential economic impact.  

From an investing standpoint, uncertainty has historically not been the market’s friend. However, perhaps looking for the silver lining in a tough situation can prove to be the winning move. In the media sector, following the trends that have been working and putting money into growth and the future could be the smarter path in what seems like an impossible journey.