Four Fairly Valued Media Stocks

One man’s panic is another man’s (or woman’s) meal. That’s why I think it’s a good time to catch up on what’s happening in media and media tech stocks and compare how they’re doing compared last fall, when we posted here about “Media Armageddon.”

A few months later, on Contentinople, I made four promising media and tech picks.

The stocks were Adobe Systems Inc. (ADBE), CBS Corp. (CBS), Cisco Systems Inc. (CSCO), and Walt Disney Co. (DIS). Two of them are media pure-plays (CBS and Disney), with the other two (Adobe and Cisco) being two of the largest digital media technology suppliers.

Let’s see what happened. I posted an update here last week, but this morning I have revised the prices due to market movements. Here is a comparison between the prices when the column was written and prices at approximately 11AM this morning.

Table 1:

	10/29/08	08/06/09	Change
Adobe	$26.80	$31.29	+17%
CBS	$8.72	$9.70	+11%
Cisco	$17.87	$20.74	+16%
Disney	$23.97	$25.52	+5%

That's not bad, but in the interest of accountability, I did suggest some stop-loss prices, which would have been triggered in at least two of the stocks (Cisco and Adobe) by the “double-dip” panic in February of 2009 when many stocks took out the October 2008 lows. Hopefully, you pulled the trigger and, like me, either forgot or blew off the stops. (I bought some Index funds in October of 2008 but, to avoid conflicts of interest, I avoid buying individual media stocks.)

Of course, this was difficult. It took incredible intestinal fortitude for people to buy stocks in October 2008 and then hold them (or even add to them) through February 2009, but those who did would have been richly rewarded. What’s more interesting about this study is what it says about market psychology. It shows that often, markets operate in reverse of how they are supposed to: People buy when stocks are too high and sell when they are too low. Panic is usually the best time to buy stocks.

What happened in the media space is an interesting case of how markets try to anticipate the future -- and often overreact. During the "Media Armageddon" of 2008, there was a sense of complete doom in the market, as if it were pricing in that most companies would go bankrupt or, perhaps, there would never be advertising or technology to buy again.

When the earnings statements started flowing in the first half of 2009, it turned out that the market had anticipated things being much worse than they actually were -- and that media companies had made deep enough cuts to rescue some of the profits.

What do these prices say about the market now? We seem to be in a sort of transitional phase, where people don’t see Armageddon anymore, but the economic recovery hasn't become evident. On a price/earnings valuation basis, these stocks have gone from being in single-digit multiples to the mid-teens, so they are no longer screaming buys.

I believe that by most valuation metrics these stocks are fairly valued, and in some cases, now richly valued. If you have profits, I would take them. There will be time to get in on the next round of panic -- which I believe will come again this fall, when people start to question the economic recovery that the market has now already apparently priced in for 2010.