One of the best parts of my job is having great clients that occasionally come up with some great ideas. The other day, a very sharp client asked me to check into what companies may benefit from the upcoming onslaught of political advertising as we approach the November elections. Since my expertise in media is limited to the fact that I watch a lot of sports on television, I thought it might be a good idea to check into a media related ETF, namely the Powershares Dynamic Media Portfolio (PBS). I had looked at this ETF when it came out in 2005, but the holdings seemed underwhelming at the time. The cable companies were spending huge amounts of capital on system buildouts, the newspapers had declining circulation, and television was becoming diluted as more and more channel choices were being added. Times have changed and so has PBS.
The Powershares Dynamic ETFs are based on a proprietary "Intellidex" that selects constituents based on factors such as fundamentals, valuation, timeliness, and risk metrics. Because of this methodology, the index is able to change with the times by adding companies that are keeping up with today's trends while reducing or eliminating those that no longer fit the criteria.
A good example is Linkedin (LNKD) which came public last May. Although Linkedin is rich from a valuation standpoint and I wouldn't buy it as an individual holding, I do like the idea of a small position in the form of a 3 ½% allocation in an ETF. I use Linkedin and had the pleasure of meeting some of the folks from the company at a recent conference. They were there to show us how to use the site as a business tool instead of just looking at it as a Facebook for adults. It is a company I believe has promise and having some small exposure to it makes sense to me.
Although PBS is not heavily weighted toward any one stock, the top holding at 5.6% is Comcast (CMCSA). Comcast recently broke out on a strong earnings report after many years of disappointing investors. The company increased the dividend 44%, authorized a $6.5 billion share repurchase, ($3 billion of which is scheduled to occur in 2012), and reported substantial growth in revenue, cash flow, and earnings. Gains in high speed internet services helped lead the way, but a large reduction in capital expenditures caught my eye. It makes sense that as more of the infrastructure becomes complete, profits should increase since it is very expensive to wire the country, but once it's there, it costs little to maintain.
Of course, the cable companies must deal with competition for our news and entertainment dollar, so PBS includes a variety of media and content providers such as DIRECTV (DTV), Lions Gate Entertainment (LGF), CBS Corp. (CBS), and Gannett (GCI), all of which are showing signs of improvement. Media in general has not been the best performing sector over the years, to say the least, so to see more and more of the companies show up in my fundamental and technical research has been quite a surprise.
As always, it is important to keep in mind that PBS, like most equity ETFs, can correlate with the overall market, especially in a correction. While media stocks seem to be showing signs of life and look attractive to me now, bear markets tend to be indiscriminate, so an exit strategy should always be in place should this idea not work out.
Now, to address the reason I took another look at media in the first place, this year should set records for political spending. As a resident of Florida, I can attest to the huge amount of money candidates are willing to spend on advertising, and that was only a primary. I'm sure I'm not the only one who gets annoyed by the constant stream of attack ads that all candidates seem to be so fond of these days, but owning some PBS and knowing companies I have exposure to are benefiting might take some of the sting out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.