Convergence!
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The Convergence Play in Media Stocks
Angela Auchey of Federated Investment looks to companies that are smart about merging content and distribution
"Convergence" is the key to investing in new media, according to Angela Auchey, senior analyst for Federated Investment Management, an arm of Federated Investors. And she means both the convergence of television and the computer and of content and distribution.
Those trends make her bullish on media, especially for names such as Viacom, Liberty Media, Rupert Murdoch's News Corp., and Disney. Her firm is the fifth-largest stockholder in Viacom and is playing both sides of the proposed merger between America Online and Time Warner.
In one of the more traditional areas she covers for Federated -- retailing -- Auchey likes stocks such as Circuit City, Home Depot, and Wal-Mart. She made these remarks in an investment chat May 25 on America Online presented by Business Week Online. Edited excerpts of the chat follow. For a full transcript on AOL, go to keyword: BW Talk.
Q: Angela, what's hot in the areas you cover -- media, entertainment, leisure, and retailing?
A: Certainly plenty of hot names. We've been bullish on media, due to the convergence of content and distribution, as well as technology. We like Viacom [VIA:B] and Liberty Media [LMG.A] quite a bit -- companies that are taking advantage of strategic combinations and companies that are changing the way that content will be delivered over the next few years. We also like News Corp. [NWS]. That's a company making huge strides in the delivery of programming globally. We've seen encouraging signs from the Fox Network [FOX], especially in its syndication sales.
Q: A lot of the Internet names that seemed to have such bright prospects last year have declined 50% or more lately. Are you buying any of the new-media names on the cheap? Or do you think it is better to stay away for now?
A: ...We think there are some interesting names -- companies like Go.com [GO] and ACTV [IATV], which is a company exploring interactive and hyper TV. Hyper TV combines the Internet and television... We're also eyeing Liberty Digital [LDIG], which is Liberty Media's Internet and interactive-content play.
Q: Are you looking for a summer rally in the tech sector? And what are you buying now -- besides the names you just mentioned?
A: We continue to have strong conviction that in the long term, investors are going to return to the faster-growing names... We're currently staying involved in the tech sector, as well as developing a wish list for when the Fed goes to a neutral bias. We may be interested in names that have fallen off quite a bit, such as BroadVision [BVSN] or some of the more classic tech investments such as EMC or Cisco [CSCO].
Q: Where's the best place to bet: old-line media companies supplying content or new portals acquiring it?
A: You have to be in both places. There aren't many old-media companies anymore. Most of the smart media companies are thinking forward about how they're going to change with convergence. So some of the names you might not think of as new, such as Liberty Media, are going to be the leaders in the way things change with convergence of the computer and the TV. So while we like AOL-TWX [America Online and Time Warner], we also like some old-line companies that are thinking new, such as News Corp., Viacom, and Disney [DIS].
Q: You mentioned interactive television earlier. Do you think it's really on its way? And is it a good investment theme right now?
A: Certainly it has fallen a bit out of favor... However, we think interactivity will occur. We've been big investors in the ways that television is changing. Last October, interactive television was introduced through OpenTV [OPTV] in the U.K.... We're particularly interested in companies looking at interactive sports, such as ACTV, or companies exploring integrated models that include opportunities in t-commerce [television commerce]. And gaming, such as Liberty Digital.
Q: What do you think about YHOO [Yahoo!] selling at 115 today?
A: We like the portal plays in general. If you're going to be in a portal, you've got to be in a brand name. With the Lycos deal last week [with Terra Networks], there's speculation of further deals. But my impression is that Yahoo wants to stay independent for now. After AOL-Time Warner, everyone was trying to marry Yahoo to companies like Seagram. But I see them remaining on the sidelines for now.
Q: Any ideas on investing in the streaming-video market?
A: Streaming video is an interesting area. There's a lot of upside. But we'll need to get past some regulatory hurdles first.... One way to play it may be through infrastructure, rather than content. This could avoid the potential pitfalls of government scrutiny. We expect some exciting things to go on in that space, as Internet speed increases with broadband.
Q: Angela, beyond new media and the Net (which seem to reach everywhere), what do you like in other consumer areas you cover, such as retailing?
A: We've been cautious on retailing for the last year and a half, due to investors' perception of slowing sales in an increasing interest-rate environment. However, we've stuck by names that have a strong brand identity or that are at a sweet spot in the product cycle, such as Circuit City [CC], which is thriving with the digital-product revolution. We also continue to like Home Depot [HD] and Wal-Mart [WMT] and have a renewed interest in Toys 'R' Us [TOY] since we met with the new CEO, John Eyler, in April.
Q: Angela, you've mentioned Viacom a few times. What is your investment thesis there? Is it one of your current favorites?
A: It certainly is. We actually owned both sides of the merger [with CBS]. Although we've trimmed our holdings a bit, we're still their fifth-largest shareholder...we have strong faith that Mel Karmazin and Sumner Redstone are going to be working hard to prove that this deal made sense. Intuitively, we like the combination of content and distribution....
Q: Today on CNN, a comment was made that dot-coms would be out of business in five years -- please respond to this.
A: We do believe that with some of the funding for dot-coms drying up, there are going to be far fewer names over the next five years... However, we do believe that a few quality names will emerge. Companies whose business models may make some sense over time include Amazon [AMZN], HomeGrocer.com [HOMG], and eBay [EBAY]....
Q: Earlier, you mentioned Disney as a pick. So you think it's a real comeback kid?
A: The stock has had a great year, bouncing off its bottom at 23 into the low 40s. We liked it a lot more at 23 than we do in the 40s. We're concerned a bit about how much of that was due to the one-hit wonder -- Who Wants to Be a Millionaire? -- and what that did to broadcast revenues at ABC. A lot of it comes down to how well Dinosaur does this summer. It had a great opening weekend, but it was an expensive movie to make....
Q: Who do you think looks good for the wireless-Internet market?
A: ...Certainly, as a group, it's a very exciting area. You can play it safely in infrastructure, such as Nokia [NOK], or make a more aggressive bet on some of the providers, such as PCS [Sprint PCS Group]. Or take it one step further and think about satellite Internet. That includes companies such as DirectTV, AOL, and Liberty Media.
Q: Angela, what is your thesis on AOL? Do you think the merger with Time Warner was a good idea? Is it a good buy now?
A: The arbitrage call would be to play it through Time Warner, if you believe in it. As you can tell from my comments earlier, I'm a fan of convergence. Lots of things about the deal make sense, such as combining the great Time Warner content assets with Internet distribution, as well as giving AOL direct access to the Time Warner cable broadband pipe.... We are investors on both sides of this equation. And we've continued to add to our holdings.
EDITED BY JACK DIERDORFF
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