Entertainment stocks are a mixed bag. The rise of OTT channels, shift toward home-viewing, disruption in traditional viewing windows, and cord-cutting have all had a hand in adding mounting pressure to traditional studios. It can be difficult to parse through all the noise to determine who will be the winners.
A good screening technique for value investors can be as easy as looking over stocks that are trading near one-year lows and at low valuations. In theory, at lower prices and valuation, risk is mitigated.
The following three picks are just that. They have been beaten down and offer very favorable upside given what I feel are temporary dislocations in the stock. Whether its headline risk or a catalyst unaccounted for, these companies have strong fundamentals that present compelling long-term returns.
Entertainment Stocks to Buy Before They Get Re-Rated: AMC Entertainment Holdings Inc (AMC)
AMC Entertainment Holdings Inc (NYSE:AMC) stock has cratered since the beginning of the year, down a positively brutal 61%. A string of events has contributed to dive in share price, but I believe the market has overreacted to headline risk, as it is want to do, and that at prices bobbing around 52-week lows, AMC presents a compelling risk reward. In the meantime, you can pick up a yield over 6% while you wait for the smoke to clear.
The lock-up expiration of a good chunk of Terra Firma’s shares in May, AMC’s secondary offering, and negative PVOD headlines (fears of the elimination of an exclusive in-theaters window have been a concern for many years, I would add, and have not materialized in such a dramatic fashion) are a few causes of the decline.
What is certain is that downside risk is low and that CEO, Adam Aron, who took the helm in January 2016 has been very acquisitive in order to increase the quality of assets and diversify internationally. The acquisitions have made AMC the largest exhibitor in the world with 1,027 theaters and 11,247 screens.
Significant investments continue to be made in renovating and reseating theaters (replacing old seats with wider, more comfortable ones), and the full benefits as it applies to viewers and cash flow have been overlooked by the market.
Entertainment Stocks to Buy Before They Get Re-Rated: Lions Gate Entertainment Corp. (LGF)
After the acquisition of Starz in June 2016, the market has failed to recognize the value in the combined entity Lions Gate Entertainment Corp. (USA) (NYSE:LGF). Spotty box office performance post-The Hunger Games franchise, though La La Land was a nice boost, hasn’t helped investors’ confidence in the movie and television studio either.
But past performance in films (Twilight, John Wick, Step-Up) and even more so in television production (Mad Men, Orange is the New Black, Weeds) tell a story of consistent hits with a tremendous about of IP that can be further leveraged in developments to come. The growth of online streaming television on mobile and other platforms bodes well for LGF’s strong foothold in high-quality scripted television. This means increasing amounts of income from the notoriously high-margin licensing business.
Back to Starz. There are ample opportunities to scale the subscriber base that is predominantly based in the U.S. with new content and bundling with other premium channels. This is an area that LGF can leverage its relationships to grow not only domestically but abroad as well. On the content side LGF can development original programming specifically for Starz, which will increase revenues all around.
Deals with China remain very much on the table as well. The partnership with Hunan TV shows an attractive blueprint for future co-production deals in the largest consumer market in the world. This deal is just the beginning of profitable exposure to the Chinese market.
Entertainment Stocks to Buy Before They Get Re-Rated: Discovery Communications Inc. (DISCA)
Industry cord-cutting headwinds don’t phase me when it comes to Discovery Communications Inc. (NASDAQ:DISCA). Its almost maniacal focus on building a base of superfans is a strategic edge that drives an extremely loyal viewership. The stock, however, doesn’t get credit for the IP, the highly engaged viewers, or the very specific, curated content.
Discovery’s recent joint venture with TEN (The Enthusiast Network) is a prime illustration of its aim to provide differentiated content to a targeted audience. The transaction will give Discovery access to the superfans of Velocity, MotorTrend.com, Motor Trend YouTube channel, Motor Trend OnDemand OTT service and TEN’s complete portfolio of automotive digital, social, live events, and original content, allowing it to tap the automotive ad market. The generally male audience will be very marketable to advertisers.
Now, such shows as Deadliest Catch are not down everyone’s alley, but the nature of the programming is unique. That is, if you want to watch dramatized accounts of fisherman adventures on the high sea, you’re going to have to go to Discovery. ABC won’t have something for you. Neither will Netflix, Inc. (NASDAQ:NFLX). Therein lies a compelling value proposition.
Additionally, Discovery’s more economical unscripted content shows support high margins on a company with shows that have international appeal. That non-US distribution business has plenty of growth ahead that will lead to a pendulum swinging back in its favor.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.