Discovery Investors Should Feel "Naked and Afraid"

Mainstream TV audiences are fascinated with sensationalistic topics; I'm sure none of us is immune to tuning in to such programming at least once in a while. But when it comes to investing in media companies, the naked truth is that you can have too much of a bad thing. During "Unwrapped Week," Discovery (DISC.A) aired a very special episode of its show Naked and Afraid. What's really unwrapped: a growing media wasteland that's become high on sensationalism and low on quality.

Cable programming guides are full of all kinds of reality shows these days, many of which put people into dangerous situations. However, putting people into dangerous situations in the nude really makes one wonder how much lower the industry can go. The titillating bonus of this past week's special episode was that viewers could watch not two but four butt-naked survivalists on Naked and Afraid .

Granted, from a pure profit perspective, it's not hard to understand why media management teams might risk tarnishing their brands by identifying popular ideas and then recycling the same concepts over and over with slightly different variations. Such redundancy is reflected all over cable, where one can find mind-blowing numbers of cooking, haggling, and real estate reality shows, for example.

Another profit-driven temptation: it's dirt cheap to churn out reality shows. Who needs "expensive" writers who may produce high-quality and thought-provoking shows? Who needs to pay actors? Forget about extensive wardrobes for these shows (especially since nudity has entered into the equation). Sets? Forget it. These can be the bayou, the jungle, Alaska, or even someone's apocalypse-prepped house.

Discovery is particularly adept when it comes to recycling strategies; take precious metals mining. Discovery isn't just home to Gold Rush, but also similar shows like Gold Fever and Jungle Gold .

It's arguable that Discovery has even copied its more fictionally geared competitors, too. Discovery's Shark Week disappointed fans when it paid homage to Comcast's (CMCSA -1.01%) SyFy Channel's B-movie shark phase that featured movies like Sharknado. Many fans sounded off about Discovery's Shark Week 2013: serious, informative reality took the back seat to over-the-top shows, including a sneaky mockumentary.

And yes, we've also got nudity in the wild. Naked Castaway is yet another Discovery Channel show, featuring just one nude survivalist instead of two. If one is good, two must be better (or four). I'm not sure where it can go from there, but I'm sure someone will figure it out.

Get a real "gold rush" with AMC
Long-term investors protect their portfolios by buying stocks of high-quality companies whose managements make solid strategic decisions that will pass the test of time. Engaging in behavior that might tarnish brands is a big step in the wrong direction.

Discovery calls itself a "non-fiction" media company, but it's hinging too much on the idea that fact is stranger than fiction instead of aiming for "non-fiction" programming that could inform or even stimulate viewers' brains.

On the other hand, let's contemplate rival cable network AMC (AMCX 1.99%). It has received many accolades for its popular dramatic shows like Breaking Bad, Mad Men, and The Walking Dead. These programs bust with attributes like excellent writing, superb acting, great sets, excellent cinematography, and even some higher end attributes like highly developed plots or real moral questions. The company is actually making investments in quality, not highly profitable content cop-outs.

In another nod to AMC's good business sense, it allowed one of its most popular shows, Breaking Bad, to end on a high note several months ago instead of surrendering to the temptation to drag it out until viewers lost interest. That may be a short-term loss, but it's a long-term gain for AMC's brand and reputation.

Meanwhile, could it be that maybe Discovery's deterioration is already beginning? Apparently shows like Gold Rush aren't "panning out" at the moment. (Although you can buy some related merch, like a gold-panning kit, from Discovery . Hopefully they will soon sell ancillary nudity survivalist kits.) CEO David Zaslav spoke at an investors' gathering this week and revealed that Discovery Channel and TLC ratings are weak, leading to lower ad sales than had been previously expected. Once-popular shows like Gold Rush and Moonshiners appear to be petering out with viewers .

Right now, Discovery shares are trading at 22 times forward earnings, a high price to pay in the media realm. AMC shares are trading at just 16 times forward earnings, with a PEG ratio of 0.71. Comcast, the cable operator that also owns NBC Universal, also looks cheaper than Discovery on the face of it, trading at 17 times forward earnings and sporting a PEG ratio of 1.03.

Although Discovery's PEG ratio of 1.36 doesn't sound like a highly overvalued stock in terms of longer term expectations, the expectations are the rub here. Analysts and investors may not be clued into the mistakes it's making now that may in fact hinder future growth . In that case, buying Discovery at today's prices is a huge mistake.

Discovery's cavalcade of increasingly sensationalistic shows actually puts the spotlight on AMC as a far higher quality stock to consider. Quality programming is so scarce it's worth a premium these days, and the funny thing is, investors can get shares of AMC at a far cheaper price than Discovery.