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Throw This Stock Away

By Rick Munarriz - Updated Apr 5, 2017 at 8:04PM

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Like stale leftovers, time to toss this out of the fridge.

It's no fun singling out losers in a falling market every week. It's almost too easy. However, the real challenge lately is coming up with three worthy replacements that seem likely to beat the market.

I'm going to go with a timely pick this week, a stock that soared this morning despite putting out some pretty grim news.

Who gets tossed out this week? Come on down, Viacom (NYSE:VIA) (NYSE:VIA-B).

Bang a gong, Viacom
Shares of Viacom traded as much as 4% higher in a down market this morning, after the media giant announced some serious cutbacks.

  • It is slashing 850 positions, or 7% of its workforce.
  • Viacom is writing down some programming and other assets.
  • The pre-tax hit will be for as much as $450 million.

Markets love tactical retreats. Viacom's moves should result in $200 million to $250 million in pre-tax savings. That's a good thing, but how pumped should investors be when even the company is bracing for leaner times ahead?

Let's go over Viacom's properties. They are mostly cable channels like MTV, Nickelodeon, BET, VH1, and Comedy Central. In theory, this is a steady business that should hold up better with the constant trickle of cable subscriber fees balancing out the rocky ad market. However, the Internet has changed that.

When even the FCC is talking about giving 95% of the country free online access, how much longer will it be before folks cancel their cable subscriptions and take advantage of free on-demand video streaming? Yes, Viacom will be a force there, but once the playing field has been completely leveled, there will be too much content chasing too few eyeballs.

It probably doesn't help that many of Viacom's properties are music-related networks like VH1 and CMT at a time when prerecorded music sales are falling and labels are using video-sharing sites to broadcast their promotional videos.

Viacom is still capable of squeezing out the occasional blockbuster through its Paramount studio arm. It has vibrant online properties. It has the popular Rock Band video game series. However, analysts don't think the winners will be enough. They have been talking down the company's earnings prospects in recent months. Wall Street now sees earnings dipping in 2009, and things can get ugly fast when you're talking about a company with $8.9 billion in long-term debt.

In short, it's not just the 850 hires leaving Viacom that should be on the way out. Investors should be doing the same thing.

Good news
As I have every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • CBS (NYSE:CBS). In many ways, Viacom's sister company is in more dire straits than its sibling. The television advertising slowdown will hit the broadcaster hard now, instead of the cable subs falling off at Viacom later. Analysts also see a much sharper decline in profitability at CBS in 2009 than they do at Viacom. Both broadcasting behemoths are also highly leveraged companies. However, CBS pays out a whopping dividend which should keep the downside in check as long as it can keep paying it. The company's reliance on old-school advertising like billboards, radio, and television may seem archaic, but it will also bounce back with the economy, whereas the digital delivery trend will be a crusher at Viacom.
  • Activision Blizzard (NASDAQ:ATVI). Rock Band rocks, but Guitar Hero is the real winner in this battle of the bands. Activision also has high-margin gems like World of Warcraft in its arsenal. Even in a rattled video gaming market, Activision is a star. It routinely tops quarterly profit expectations, and it's one of the lucky companies where analysts are actually raising estimates instead of hosing them down.  
  • Google (NASDAQ:GOOG). Viacom may have sued Google's YouTube for copyright infringement last year, but we all know who the winner will be in the end. YouTube is the world's top video-sharing site, by far, and that makes it the likely couch-potato hub of the future. Viacom hasn't done itself any favors in becoming an enemy of the site, especially while sister company CBS has profited as a YouTube partner. Viacom hasn't even been as active as its rivals to prepare for the inevitable on-demand digital future, like News Corp. (NYSE:NWS) and General Electric's (NYSE:GE) NBC teaming up to launch Hulu. It's just fitting that the leader in online advertising should be the gateway to the new boob tube.  

Other headlines out of the weekly trash can:

Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.

Google is a Motley Fool Rule Breakers pick. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz wouldn't BET on Viacom bouncing back anytime soon. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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