Tony Wible of Janney Capital gets right to the point in a recent report he sent to investors about the state of media stocks:
He noted that the group has advanced in concert with the broad market since the dark days of early 2009 and particularly so far in 2013. Wible posits: "This brings up the argument of whether valuations could be expanding too far too fast."
It's a reasonable jumping-off point for a lively debate. And if you happen to be in the camp of optimists, you have many stocks to look seriously at right now.
Diversified media stocks are up about 25% on a year-to-date basis. Even though they outshine the 15% return of the S&P 500, the sector still trades at a smaller-than-typical premium to the benchmark index. "Opportunities in the group seem limited, based on valuation disparities, but we expect to see more movement as sentiment around ratings, ad rates, the economy and digital threats and opportunities become clear," Wible points out.
At this time of year, the public is fixated with the summer movie blockbusters. Meanwhile, the studio stocks are up 47 percent as sentiment builds for the summer lineup and the sector advances toward its seasonal high point. Lions Gate Entertainment (NYSE:LGF) trades currently at about 13.9 times the consensus EBITDA (earnings before interest, taxes, depreciation and amortization) to the group's average of 13.2 times, which is below the historical premium and group average, Wible notes in his report. At the same time, DreamWorks Animation (NASDAQ:DWA) "looks rich at 19.3 EBITDA, which is higher than its 4% premium."
These stocks have had nice runs so far this year. Consider that the benchmark Standard & Poor's 500 index has advanced 11% since the start of the year, versus 25% for Viacom, 69% for Lions Gate, 19% for Carmike Cinemas, and 21% for DIRECTV.
Of these stocks, I am most intrigued by Lions Gate -- because of the lesson it provides to stock market mavens and others.
Please allow me to digress for a moment in this discussion.
I discovered this company a decade ago, when it was a pipsqueak in Hollywood and on Wall Street. What I learned back then -- and it has influenced what I continue to look for today -- was that one seemingly throwaway nugget of information can provide an observer with some valuable insight. It can go a long way toward helping to make a determination on a company -- and, by extension, the prospects for its stock. (Click here to examine Lions Gate's fundamentals.)
In this case, a friend of mine in Los Angeles had told me that Michael Burns, the vice chairman of Lions Gate, would be coming to New York to meet securities analysts, and our mutual friend suggested that I interview Burns for my media column.
Always on the lookout for a good story about a fledgling company, I dutifully interviewed Burns. At the time, his company's stock was nestled comfortably in the single digits and well out of the limelight.
Now, whenever journalists meet a corporate executive for the first time, they would be wise to wear a hat, because they're going to get a lot of snow thrown at them, in the form of endlessly optimistic forecasts. Oh, Burns, too, was brimming with favorable reasons that Lions Gate would prove to be a company to watch.
But in passing, he also said something that I immediately picked up on: When he and his boss, CEO Jon Feltheimer, had traveled to New York, they sat in the coach section of the plane, to save the company some money. Since Hollywood executives like to live as if their employers had the means of, say, the Sultan of Brunei, Burns had made a strong impression on me. Here was a movie official who actually liked to save a few bucks, even if it meant inconveniencing himself at the same time.
Burns' comment underscored Lions Gate's judiciousness and unpretentious business style. Here was a company that watched its pennies, a rarity (to say the least) in the media and entertainment industry.
When you give media stocks a second look, listen for the piece of valuable insight that will help guide you. It's worth the effort.
Fool contributor Jon Friedman has no position in any stocks mentioned. The Motley Fool recommends DIRECTV and DreamWorks Animation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.