Comcast Making Another Bid For Mega Content Deal

You may remember a few years back when Comcast (CMCSA) made a bid for Disney (DIS) only to be turned down. Reports today have them once again making a play for a blockbuster media content deal. Initial reports out of a Hollywood web site last night had Comcast buying NBC Universal outright from General Electric (GE) for $35 billion but that story has conflicted with more reliable news sources today that have Comcast forming a joint venture with GE’s NBCU division. Comcast would contribute cash ($6-$7 billion is the rumored figure) and combine its own content assets with NBCU, spin the new company off, and retain 51% ownership (with GE having the other 49%).

As Peridot Capital clients own shares in both Comcast and GE, this deal is of great interest to me. I am not convinced Comcast making a huge push into content is the right move (cable service and content creation are quite different businesses) but I can see why Comcast CEO Brian Roberts might want to expand his net.

After all, they are already the largest cable operator and moves to boost that position will draw anti-trust concerns. Given that phone companies like Verizon are making a big play into cable, not to mention the typical satellite competition, owning solid content providers would make Comcast less concerned with how many people are using their pipes for cable access.

How does this play out for investors? Well, in the short term it will be seen as a negative for Comcast as people wonder if content is really where the company should be turning its focus, especially if it means spending billions of dollars in cash to do so. Longer term, as long as Comcast does not make any significant changes that threaten the profitability of NBCU, it could contribute a nice chunk of stable cash flow and diversify their business.

The impact on GE is harder to predict. On one hand, investors worried about GE’s balance sheet would be happy to see the company unload some of NBCU’s debt and also collect some cash in exchange for giving up 31% ownership (GE currently owns 80% of NBC, with Vivendi owning 20%). On the other hand, GE would become even more concentrated in cyclical and financial services business lines for its earnings. In a weak economic environment, the stable cash flow from NBCU has been helping, not hurting them.

Overall, I would be slightly more bullish on Comcast should this deal go through, mainly because I think CMSA stock would trade down more in the near term. Comcast is a stock I really like already, and although people will question a foray into media, I don’t think Comcast’s long term profitability will be negatively impacted by this deal. The uncertainty might just provide investors a nice entry point.

As for GE stock, I still think it represents a good value longer term (assuming you think the global economy will slowly improve) but I don’t think reducing its NBC stake would warrant as much of a change for the company relative to the impact on Comcast). I would not chase GE stock if it moved higher on this deal, but if both stocks dropped on the uncertainty surrounding it, both would be good values at the right price. That said, I would give the nod to Comcast for value investors looking to make an initial investment post-deal.

Full Disclosure: Peridot clients owned positions in both Comcast and GE at the time of writing, but positions may change at any time

Time Warner Completes Cable Spin-Off, Sets Stage For AOL Split Next

Time Warner (TWX) has long been a media conglomerate difficult for investors to dissect. However, that may be about to change and the moves could finally extract some value for Time Warner shareholders. The company will complete its spin-off of Time Warner Cable at the end of the month, which offloads billions of debt to the cable company and frees up cash flow at TWX.

Time Warner is also making some moves at its AOL division. AOL has hired Tim Armstrong, formerly the head of U.S. sales at Google, as its new CEO. The conventional wisdom is that Time Warner will spin off AOL as well, in order to allow Armstrong to maximize profit and growth potential at the online unit.

All of this should be good news for Time Warner shareholders, whose stock has been cut in half over the last year and sits near its lows. Time Warner retains some very strong brands, including HBO. With less debt from the cable division, coupled with a $9 billion cash infusion from the spin-off and a new strong management team at AOL, investors might finally begin to look at the stock again in the intermediate term.

As a result, bargain hunters who prefer strong large cap companies might be interested in checking out TWX shares at $8 each. Not only do they sit near their lows, but they yield 3% and trade for less than 5 times trailing cash flow.

Full Disclosure: No position in TWX at the time of writing, but positions may change at any time

CNBC Documentary by David Faber, “House of Cards,” Is Worth Your Time

One of CNBC’s finest, David Faber, recently completed a two hour documentary about the housing bubble and the credit crisis. I had the chance to watch it on Sunday and it is very well done. For those of you who are interested in how the combination of mortgage brokers, Wall Street, and consumers led to the dire financial predicament we find ourselves in right now. Faber really hits on all of the major culprits and explains them well along with his superb guests.

CNBC replays House of Cards in prime time during the week and over the weekends. According to my Comcast program guide, the next airing is Wednesday from 8-10pm ET but check your local listings and set your VCR or Tivo.

With Consumers Paring Back, Netflix Business Gets Stronger

If people are looking to cut back on discretionary spending, the Netflix (NFLX) mail order DVD service can obviously help. Rather than spending $30 at a theater for a couple to see a movie and order some snacks, a Netflix subscription can cost half that for an entire month. Not surprising, fourth quarter sales and earnings at Netflix (reported last night) were very impressive and the stock is soaring today, trading up near $35 per share.

Despite being relatively recession-proof, Netflix stock at current levels doesn’t get me very excited from a value standpoint. One can certainly justify a 2009 P/E north of 20, as it is today, but as a value investor that is not cheap enough for me to get overly excited, despite the strong business fundamentals. I will, however, continue to make good use of my Netflix subscription, and I highly recommend it.

Full Disclosure: No position in Netflix at the time of writing, but positions may change at any time

Gift Idea

When I was growing up the gift option of choice was federal savings bonds. When I was old enough to be allowed to make my own financial decisions I promptly sold them and invested the proceeds in the stock market, where my long term inflation-adjusted returns would be much higher. Among both my high school and college graduation gifts were shares of stock and the returns from those have been impressive, but the advantages of such gifts often go beyond dollars and cents.

Garnering interest in the markets was never a problem with me, but that was clearly the exception. Giving children shares of stock not only gives them a valuable financial asset, but it also allows one to expand the financial education process with them at an early age. At some point (perhaps not at first depending on how old they are), recipients are going to ask what that framed share of Disney stock is, and at that point you can explain it to them. Such a conversation might, at the very least, start them toward a path of being very educated when it comes to the responsibility of managing their finances.

Are All Consumers in the Same Boat?

Last weekend I attended some festivities for a friend’s birthday that included dinner at the Landmark Buffet at the Ameristar Casino and Hotel (ASCA) in St. Charles, Missouri. Along with spending some time with good friends, I was also especially interested to see how busy the casino was on a Friday night. If you simply looked at the stock prices of the major casino companies in the United States, you would have predicted the place would be empty. Gaming stocks have been crushed lately on consumer spending worries. ASCA stock, for example, is down about 45%, from a high of $38 to the current quote of $21 per share.

Such large drops are fairly surprising given that gaming stocks are widely believed to be fairly recession-proof. Rather than take lavish vacations, or even hop on a plane heading to Vegas, people tend to scale back and just drive to a local riverboat casino instead. Despite the typical feeling that gaming holds up okay in recession, the casino stocks this time around have really taken it on the chin, so investors are clearly betting that this time is different.

Surprisingly, the Ameristar Casino was as crowded last Friday as I have ever seen it. At the buffet, for example, people are still standing in line for at least an hour for a $21.99 crab leg, steak, and shrimp dinner. After seeing such a large crowd, I came to the conclusion that the health of the consumer likely depends largely on where the person lives. Here in the Midwest, the housing market downturn has been less severe because it never really got crazy to start with. Compared with hot areas like California, Nevada, Arizona, and Florida, states like Missouri had much more subdued housing speculation.

The result of that is that things aren’t that bad here. You don’t hear about huge numbers of foreclosures or see evidence that the consumer is largely tapped out. The main problem here with respect to housing is simply a supply-demand imbalance. There is still a decent amount of building going on, in the face of high levels of for-sale signs out already, so houses aren’t selling. However, people are simply sitting on them, reluctant to lower prices to motivate buyers, much like other places across the country. But without extreme speculative activity, the negative impact on consumer spending does not appear to be as drastic as other places across the nation.

How can we make investment decisions based on this? Well, my opinion is that many consumer related stocks have been beaten down way too much. Companies focused on the roughest housing markets will likely see the brunt of the negative impact. Other areas such as the Midwest will likely hold up well on a relative basis. For a company like Ameristar, which owns properties in Missouri, Nebraska, and Mississippi, things might wind up being okay.

Additionally, the upscale consumer sector should still do relatively well. Sure, things will slow down, but the high end of the market will drop off less than the lower end, and likely will rebound faster once things turn around. After all, rich people probably aren’t scaling back too much due to elevated inflation levels.

One other area I think is poised to hold up well is the restaurant sector. Wall Street is bracing for people to stop eating out during the current economic downturn, but I would argue that eating out is due more to a secular shift in behavior than a bi-product of easy credit. People nowadays work longer hours than they used to and have less time to make dinner every night. I’m not saying dining spending won’t drop when things get tough, but I think if you look at the hits the stocks have taken and what that implies about business expectations, things won’t be nearly as bad as investors are pricing into the stock prices of restaurant chains.

All in all, I think investors should differentiate between the varying degrees of consumer stocks. A lower end company operating in California or Florida is going to fare differently than a high end company in the Midwest. A Vegas casino might not do as well as one based in St. Charles, MO in uncertain economic times. Traffic declines at a clothing retailer will likely be more dramatic than at a restaurant chain, if indeed eating out is a decision made for convenience more than monetary reasons. A new wardrobe is much easier to postpone than making time to prepare dinner at home.

As we allocate money to the consumer discretionary sector, it might serve us well to think about these things.

Full Disclosure: No position in ASCA at the time of writing

Thoughts on the Financial Media

Since it came up in discussions regarding my last post, I wanted to touch upon the issue of the financial media a bit more. I think it is important for investors to understand why media outfits like the NY Times (NYT) might not be the best resources to use when making investment decisions. Recent events involving a story the aforementioned paper published about Warren Buffett’s interest in buying a 20% stake in Bear Stearns (BSC) bring the issue to light even more.

For those that didn’t hear about it, shares of Bear Stearns rose more than 10% on Wednesday after the NY Times reported that Buffett was one of several parties discussing the purchase of a minority stake in the troubled investment bank. Within minutes other reporters were playing down the story after speaking with sources they have within the industry. The next morning, Bear even refuted the story itself on a call with investors. Lots of people have lost money due to what looks to be an erroneous report. Most likely someone leaked the story to a NY Times reporter, assuming they might publish it, causing a temporary jump in the stock price, allowing them to sell some stock at a nice profit right before the end of the quarter.

Now, yes, that explanation as to why it all happened is purely speculation on my part. However, based on what happens all the time on Wall Street, coupled with the fact that the story was immediately rebuffed by numerous sources, including Bear Stearns, leads me to be cynical and suspect that the Times did not check with many reliable sources before reporting Buffett’s supposed interest.

I bring this up because media outlets are not the most trustworthy of resources when trying to gauge the merit of a particular investment. The NY Times is often guilty of this because they are based in the financial capital of the world and have access to lots of Wall Street people, but many other media people make the same mistakes.

It shouldn’t really be all that surprising though, that is, the fact that newspapers and the media in general is often biased in their reporting. In recent months, the NY Times has published numerous stories, from numerous reporters, regarding many different financial corporations including student lending firms, credit card issuers, and mortgage companies. Some of these firms I am invested in, so although I don’t read the NY Times regularly, I have seen some of the “journalism” that has been published to the extent that it has caused stock price movements that interest me.

It is no secret that the Times has a liberal bias in many cases, and some of their attacks on large consumer lending companies makes it clear that some of their reporters are purposely trying to criticize large financial institutions for their lending practices, whether it be to college students, sub-prime home owners, or credit card dependent consumers. I guess it’s just the world we live in.

Now don’t get me wrong, I am all for throwing the book at companies that break the law or act in extremely unethical ways. By no means am I arguing that unlawful acts should not be punished to the fullest extent, and please don’t assume that I am writing strictly to make a political point. Most times I am successful in separating my political beliefs from my job as a stock picker, not only because it serves me and my clients best by doing so, but also because the views are often at opposite ends of the spectrum.

However, since consumer lending activities have become such a big issue lately, the media has started to really cross the line, in my view. It has, in part, I believe contributed to the fact that many Americans feel like they are constant victims of big business, whether it be the oil companies’ supposed price gauging (which there is no evidence of), or any type of consumer lending that has been called predatory in nature without any evidence to support the claim.

Stories in recent months from the likes of the NY Times have sharply criticized many financial institutions, and in some cases, have even gone as far as insinuated that they are breaking the law. Some examples of these horrible activities include student loan companies that factor in things like career path and which college you attend when determining your loan eligibility and interest rate, or mortgage companies that are offering wealthier white borrowers loans more often, and at more attractive terms, than minority, less wealthy borrowers. It turns out, in fact, that mortgage companies also offer their sales people higher commissions for more profitable adjustable rate mortgages than they do for fixed rate versions (much like stock brokers usually try to sell clients annuities — they have high fees and sales commissions of up to 8%!).

Now, if you read these stories without a cynical tilt you are more likely than not going to conclude that companies like Countrywide (CFC), Sallie Mae (SLM), and JP Morgan Chase (JPM) are crooks who are discriminating against anyone and everyone in the name of profitability. Those profits in the end wind up in the hands of wealthy executives and shareholders, which results in an ever-widening gap between the wealthy people making the loans and the less wealthy ones receiving them. This press coverage does result, at least in the short term, to lower stock prices and a general anger toward big business in general. In my view, these attacks are not only often unfair, but in some cases completely one-sided and oftentimes based on assumptions that are simply untrue.

For instance, is it fair to imply that it is at most illegal, and at least unethical, to factor in what degree you are seeking and what school you plan on attending when deciding whether or not to offer you a student loan and at what interest rate? Believe it or not, lenders offer loans to people based on what they think the odds are of being repaid. The better your credit, the more likely you are to not only get a loan, but also a low interest rate. Lenders need to consider this issue more than any other when deciding who to lend money to. The higher the risk, the less often you will qualify for a loan, and even when you do get approved, your increased credit risk results in higher interest rates.

Now, does anyone think that which college you attend and which career path you are pursuing might be relevant factors in determining a borrower’s creditworthiness? The fact is, there is a direct correlation between education, career, and annual income. It also stands to reason that the more money you end up making, the higher probability there is that you will be able to pay back your student loan. Therefore, is it unfair to accuse Sallie Mae of illegally discriminating based on school choice or career path? Most economists would say “yes.”

The same arguments can be made on any number of fronts. Do a smaller percentage of minority borrowers get low interest rate loans because of their skin color and ethnic background, or is it because of their credit worthiness? Most likely, the latter. That does not mean we should not strive to put in place policies that seek to get minority education levels and incomes on par with everyone else, it just means that accusing the banks of racism is probably crossing the line.

The current mortgage and housing industry downturn we are seeing is partly due to the fact that lenders actually abandoned these basic lending principles. Traditionally, the better your credit history, the better loan you were offered. Not surprisingly, the housing boom led companies to get greedy. The more loans they made, the more money they made (at least in the short term, as we are finding out now).

The result was that the lenders completely turned their lending practices on their head. If you couldn’t afford a standard 30 year fixed rate mortgage with 20% down, a new type of loan was created for you allowing little or no down payment and an attractive teaser interest rate. All of the sudden, people who couldn’t get loans were able to go out and buy houses they couldn’t normally afford. And that’s how we got ourselves in this mess.

Amazingly, we lived in a world where the better your credit, the worse your loan terms! High quality borrowers put 20% down on their house and paid 6% interest while sub-prime borrowers put less down and got low single digit introductory rates. How on earth does that make any sense?

It doesn’t, but people are paying for it now. Many lenders have either gone out of business or are losing money hand over fist now since they failed to align the credit worthiness of the borrower with the loans they were offered. And yet, some people want to criticize smart lenders for doing their due diligence and aligning credit histories with interest rates.

Consumers are also to blame since those facing possible foreclosure are constantly being quoted as saying they were so intent on getting their house that they didn’t read the loan agreement before signing it. Well, if you were about to be loaned hundreds of thousands of dollars and didn’t bother to take the time to read the paperwork to find out how much that loan was going to cost, maybe it’s your fault for taking the money just as much as it was the lender’s fault for offering it to you.

I’m getting a little sidetracked here, but the basic point is this. It is imperative that lenders size up the creditworthiness of borrowers to determine loan terms that are appropriate to compensate them for the repayment risk they are taking. Doing so is not illegal or unethical, although hundreds of biased press stories will try to convince you otherwise. These issues are all coming to a head in 2007 and due to the highly divided political landscape our country is facing, people are becoming more and more inherently biased. It’s a shame that this is the case, but it is simply reality. And it’s not just the Times, of course. Conservative papers will be coming from the exact opposite end of the spectrum. It’s just the world we live in today.

This is important from an investing standpoint because you need to consider these issues if you are going to allow the media to play a role in your investment decisions. I would recommend that you not base your investing on what you read in the media. Due to inherent biases, there is going to be information left out because it doesn’t prove a certain desired point, and other information is going to be embellished to make a certain case seem even stronger.

The best thing to do is to base your decision on the facts, not on opinions. In many cases that means taking what public companies say at face value. It is true that there will always be Enrons and WorldComs in this world. However, there are far more biased press reports that ignore facts than there are crooked companies and executives. If you are trying to research a company’s mortgage portfolio, for instance, and the company is willing to break out in agonizing detail exactly what loans they have made (what the delinquency rates are, what the credit scores of the borrowers are, etc.), then you are probably better off analyzing that data than the opinions expressed in the media.

If a company is unwilling to disclose the data you feel you need to make an appropriate investment decision, then find another company that will. In the world we live in today there are too many people with an agenda or a bias that colors what they feel, think, and publish. Heck, I’m guilty of it too. If I’m going to write about a stock that I am invested in, won’t I tend to be bullish? Of course.

However, the merit of my opinion can be greatly increased if I use facts to back up my assumptions. If someone offers up facts and you agree with their underlying assumptions, it is far more likely they will be right. If you read or hear something with a lot of opinion and speculation, but little in the way of facts (say, for instance, in the case of Warren Buffett’s supposed interest in buying Bear Stearns), perhaps it is prudent to be more skeptical.

Take the case of Bear Stearns, for example. On Wednesday the NY Times reported that Warren Buffett was discussing taking a 20% stake in the company. There was no evidence in the story that suggested the rumor had any merit. Within 24 hours numerous reporters were doubting the story after talking with their sources and Bear dismissed the rumors directly. We cannot know for sure if Buffett will wind up buying a 20% stake in Bear Stearns, but based on the factual information we have, I wouldn’t be willing to bet any money on it.

Full Disclosure: No positions in the companies mentioned at the time of writing

Forget Betting on NFL Games, Wager on Fantasy Performances!

I probably wouldn’t have seen this story if I didn’t have a merger arbitrage position in Station Casinos (STN), but I’m glad I did. It turns out that Station sports books in Vegas are now going to let you bet on your fantasy football players. Here is the first couple paragraphs of the AP story:

Vegas Sports Book to Take Fantasy Bets

Thursday August 30, 12:33 pm ET

By John Mcfarland, Associated Press Writer

Las Vegas Sports Book to Start Taking Bets on Players’ Projected Fantasy Statistics

The billion-dollar business of fantasy football is getting another new player: Las Vegas oddsmakers. Station Casinos Inc., the fifth-largest sports book in the country, was to become the first to release a betting line — at 7 p.m. EDT — and start taking wagers based on players’ projected fantasy statistics.

So instead of plunking down a bet on whether the Saints will beat the Colts next week, or how many points will be scored, a better in Vegas can wager that Reggie Bush will finish with more than 16 fantasy points. Or that Peyton Manning might be under 21.

I can just see it now. People betting against their own fantasy roster to ensure they win some cash, either from their bets or from winning their fantasy league. It really is a good idea for Station though, as I have no doubt there will be enough people doing this to make it worthwhile for their books.

Full Disclosure: Long shares of Station Casinos until the merger closes

Barron’s Points Out Cramer’s CNBC Performance Fails to Impress

A very interesting cover story in Barron’s this week about CNBC market guru Jim Cramer and the track record of his investment recommendations on his nightly television show, Mad Money. Essentially, Cramer’s picks were found to have lagged the market over the last two years. While certainly not surprising to professionals, many retail do-it-yourself investors need to be aware of this story.

I wanted to write about it because I get a lot of emails asking about certain stocks, and very often the inquiries I get coincide exactly with new Cramer picks. Given Cramer’s successful stint as a hedge fund manager, many may be surprised to learn that his picks don’t perform well at all relative to the overall market. However, there are reasons this should not be very surprising.

The most glaring that I can think of is that Cramer needs to fill an entire hour of television time five days per week. That means he needs to come up with a handful of “great, new investment ideas” each and every day. Logic should tell you that there simply aren’t that many great investment opportunities. How much confidence do you think he truly has in every pick he highlights on his show? He might not concede anything himself, but watchers of his show should keep in mind that making so many picks almost ensures that you get a good mix of bad ones to go along with the good ones. You really can’t expect anyone, Cramer included, to post market-beating results while giving out so many recommendations.

You should also keep in mind that Cramer is no longer in the hedge fund business, he’s in the entertainment business. He wants to bring in viewers and in trying to do so, he needs to make it interesting so people keep coming back. In doing so, it would not be surprising to think he might try and get viewers a little more excited about his picks than is warranted. In trying to boost his ratings, it is understandable that he might cheer lead a little bit more than the typical market professional. Not surprisingly, this might set his picks up for disappointments on the performance front.

I’ll leave this topic with one more point about Cramer. To his credit his record at Cramer Berkowitz, his hedge fund, was very good. I believe his investors’ returns net of fees were around 24% annually, or something in the mid twenties (I read his autobiography, but it was awhile ago). This number, on the surface, appears to be excellent. However, keep in mind a couple things about that figure.

First, Cramer ran his fund from the early 1980’s through the 1990’s. Essentially, his time running money professionally overlapped exactly with the greatest bull market our country’s stock market has ever seen. I believe the S&P 500 compounded at around 15% per year during his hedge fund days. So, it’s not like he was making 20-something percent during a time when making money was difficult.

Second, if you read his autobiography, Confessions of a Street Addict, you’ll learn that he made a lot of that money in some pretty interesting ways. Since he was a big player, he made tons with IPO share allotments that he was allowed to flip on the first day of trading, which amounted to free money with little risk. In his book he also talks about how he would get word of analyst upgrades and downgrades before the information was made public to everyone, because his firm was a big client of the investment banks who issued sell-side reports.

If you factor in the market averaging 15% and throw in the other ways in which Cramer was able to make money for his clients with very little effort or insight, you might understand a bit more why his picks on Mad Money have left much to be desired. If you want to learn about the market and be entertained, Cramer can have a lot to offer. For stock picks though, I would not suggest you tune in for that reason alone.

Apple, Not Amazon, Should Buy Netflix

Rumors of a merger between Amazon (AMZN) and Netflix (NFLX) have been rampant for months now, with the latest sending Netflix shares up over $25 each last week. However, with Blockbuster (BBI) lowering prices on their online movie rental service, Netflix is slumping back down to $20 per share. Amazon seems to be trying to get their hand in everything these days, which is probably why rumors of a Netflix purchase won’t go away. However, given the price tag that it would take to land Netflix (about $1 billion after accounting for the company’s $400 million in cash), I think it would make more sense for Apple (AAPL) to make the deal.

Obviously, the mail order rental business won’t be around long term given the move to digital media distribution, so the value in Netflix is their subscriber base. It isn’t clear which method of digital home movie watching will win out five or ten years from now. The retail storefront is already dying, thanks in part to the mail order business, but video-on-demand (VOD) from cable companies like Comcast (CMCSA) seemed like the most reasonable candidate to take over the movie rental industry.

However, Apple TV might throw a wrench into that idea. Being able to purchase movies online, download them to a set-top box, and watch them on your television as well as your computer, iPod, or iPhone could be a game changer. We also learned this week that Apple is in discussions with the movie producers about electronic movie rentals through iTunes, rumored to be $3.99 for a 30-day rental. If Apple can perfect both renting and purchasing movies online, video-on-demand might have a tough time competing since the cable companies would house the content on their own servers, allowing for a lot less mobility and flexibility.

If Apple is serious about rivaling VOD, a purchase of Netflix could make a lot of sense. The mail order business will likely do well until new digital technologies become mainstream, at which point converting users over to a digital model wouldn’t seem to be very difficult. After deducting the cash on Netflix’s balance sheet, an acquirer is paying less than 1 times revenue for their millions of subscribers. I think a Netflix-Apple combination would really match up well against Blockbuster and the cable companies. Netflix is already trying out some new digital download technology to distance itself from Blockbuster, so Apple would be a great partner on that end. An Amazon deal just seems to make less sense, which is perhaps why that rumor seems to never come true.

Full Disclosure: Long shares of Apple at the time of writing