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December 01, 2014
New Models and New Mid Cap Signal
Northlake’s Market Cap model shifted from large cap to mid cap for December. As a result client positions following this model were shifted from the S&P 500 (SPY) to the S&P 400 Mid Cap (MDY). There is no change to the growth signal in the Style model. Client positions in the Russell Growth (IWF), initiated for the first time last month, will be held at least until January.
As a reminder, November marked the debut of revisions to the Market Cap and Style models. Each model has new inputs and has shifted to a formal set of internal and external indicators. The internal and external indicators replace the former use of “economic, interest rate, and stock market indicators” with the stock market indicators now becoming the internal indicators.
Before looking more at the latest signals, here is recap of how the models work. The Market Cap model continues to recommend either large, mid, or small cap. The Style model has undergone greater change and now has six possible outcomes: large cap growth, small cap growth, large cap value, small cap value, large cap neutral, and small cap neutral.
Further analysis completed by Ned Davis Research (NDR), the original developer of the models, indicated that adding a neutral option produced value added (i.e. better returns in the long run). Northlake worked with NDR to see if linking the style signal to the market cap signal would also add value. We determined that when the Market Cap model was on a small cap signal, the model produced a greater return if the style exposure was also in small cap.
We are in the process of completing a “white paper” describing the models and the changes in detail. It should be in your inbox within the next week.
Going back to the new December signals, the Market Cap model shifted to mid cap primarily due to shifts in internal indicators. Three indicators moved from the large cap to small cap column: Stocks Above 50 Day Moving Average, Net New Highs, and Adjusted Advance-Decline Line. These indicators confirm a broadening advance in the market, historically a time when small and mid cap stocks perform better than large cap stocks. The shift in these indicators moved the overall internal indicator recommendation from large cap to mid cap. In turn, the move of the internal indicator to mid cap when balanced against a weak large cap signal from the external indicators, shifted the entire Market Cap model to mid cap.
The Style model had a lot less volatility this month. Only one underlying internal indicator shifted, as the Moving Average Cross now favors growth. The internal indicators in the Style model strongly favor growth reflecting good performance from a wide array of growth stocks over the past few months. The external indicators are a split decision and rest on a neutral reading. The combination of growth internal and neutral external leads to a solid growth signal.
Last month was the first using the newly updated models and the results were good. The Market Cap model was recommending large caps (SPY) that gained almost 3%, while mid cap was up less than 2% and small cap was barely positive. The large cap signal has been in place since August 1st during which time large caps have gained over 7% compared to a rise of over 5% for mid cap and small cap. The Style model completed its first month on a growth signal in November and growth outperformed value across large cap and small cap.
MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.
November 13, 2014
Activision Blizzard: Attractive Play on Video Game Cycle
Activision Blizzard, Inc. (ATVI) is a new buy for Northlake clients. Now is a good time to invest in ATVI following recently announced better than expected third quarter results. In addition, there have been concerns about growth at ATVI for 2015, but the worries seem to be easing due to the just reported better than expected sales and recent announcements about the pipeline of games in 2015. ATVI is trading at a meaningful discount to its peers. As growth expectations pick up, we believe ATVI could experience expansion in its P-E to match the industry average.
An additional positive is that there could be upside to 2015 EPS estimates as Vivendi sells the last tranche of ATVI stock it received in the sale of Blizzard to Activision. Over the years, ATVI has been opportunistically buying back its own shares, and more share buybacks could drive 2015 EPS estimates higher.
The bottom line is that Northlake has taken a new long position in ATVI at what we see as a low valuation on conservative earnings estimates. We believe that the P-E multiple could expand from 14x to 16x 2015 earnings of $1.50 per share, giving us an price target of $24, for a gain of 20%. At 16x earnings, ATVI would still trade at a discount to its closest peer, Electronic Arts, which trades at over 18x 2015 estimates presently. Should the story evolve as we expect, especially success in recently introduced games and the game releases in 2015, a secondary target in the upper $20s is achievable in the next 12 months.
The video game industry as a whole is looking strong as a new generation of game consoles has been selling briskly and well ahead of initial expectations. Gamers should now shift their spending to software for their new consoles. ATVI has a strong pipeline of next generation games to drive growth during the hardware to software shift, starting this holiday season.
Key titles include the recently released Destiny and Call of Duty: Advanced Warfare, and the upcoming expansions to World of Warcraft , Starcraft, and Skylanders. Additionally, the Blizzard unit announced their first new Intellectual property in 17 years, Overwatch. The initial beta of the game offered to attendees at last week’s Blizzcon convention has been met favorably. Another new title for 2015 that has received good buzz is Heroes of the Storm.
Overall, we believe that ATVI is well positioned for a successful holiday season and for growth in 2015 and beyond. The shares are currently undervalued with positive catalysts lined up from now through 2015.
ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. ATVI is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Posted by Steve Birenberg at 03:56 PM in ATVI
November 10, 2014
Signs of Bottoming at CBS
CBS Corporation (CBS) reported third quarter results in line with or very slightly ahead of recently lowered Wall Street estimates. CBS shares have performed quite poorly this year, down almost 20%, as earnings have steadily fallen due to weaker than expected advertising trends at the CBS Network and the company’s owned and operated TV stations. In addition, investors are worried about a collapse in the TV network business model if TV begins to be delivered via the internet (over the top or OTT) rather than through the cable or satellite set-top box. CBS shares have also probably been a victim of high expectations as the stock entered the year up about 10 times from the summer of 2009 when Northlake first began buying the shares.
I had hoped that the current quarter would set a bottom for the shares if the quarter served to stabilize estimates. My hope was only partly rewarded. Earnings were pretty solid against lowered expectations, a good first step. However, TV advertising, particularly at the CBS Network was a little weaker than expected, especially considering the benefit of the broadcast of September’s Thursday night NFL games. Management did signal better ad trends in the current quarter but many other TV networks have stated that the TV ad market is still sluggish at best.
One positive coming from the quarter is that for the first time ever advertising revenues as a percent of total company revenue fell below 50%. CBS is among the most exposed companies to ad trends since it does not own cable networks that get a large portion of their revenue from monthly affiliate fees paid by cable and satellite companies for the rights to provide the network signal to their customers. CBS is beginning to receive fees from cable and satellite companies for the rights to its main network and management reiterated the growth path of this revenue stream over the next five years. Another factor lowering ad exposure is the big success at Showtime and CBS selling its content to other networks in the U.S. and abroad and to OTT providers like Netflix. The potential to sell Showtime OTT, as HBO has announced, could be a positive spark to the shares.
Overall, I think it pays to stick with CBS. Some signs that TV advertising growth has bottomed, a better advertising outlook on lower expectations for 2015, possible hidden value at Showtime, and continued strength in monetization of TV content should capture investor attention over the next few months and return CBS shares to favor. If earnings estimates have indeed bottomed and advertising growth picks up, CBS shares offer 20-30% upside over the next six months. Supporting the stock in the meantime is an aggressive share repurchase plan and one the best management teams I know of in any industry.
CBS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. CBS is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Posted by Steve Birenberg at 10:30 AM in CBS
November 08, 2014
High Expectations and Timing Issues Should Not Hold Back Disney
In a very tough year for media stocks, Disney (DIS) has been a standout performer. At recent highs, the shares were up over 20% for the year, more than twice the gain in the S&P 500. DIS was a victim of its own success after reporting its latest quarterly earnings. The results were slightly above expectations but not as big a surprise as the last few quarters. The company also reminded investors that higher sports rights costs at ESPN would slow earnings growth in the cable network segment in 2015 before it accelerates again in 2016. These two factors plus higher corporate wide pension costs and lack of detailed clarity on the company’s share buyback plans in 2016 led to a 2% decline in DIS shares following its latest earnings report.
I believe the recent pullback will prove temporary as ESPN growth is locked in over the next several years as sports rights costs are known and higher affiliate fees paid by cable and satellite companies to cover the added expense have already been negotiated. In addition, sports should continue to prove attractive to advertisers and not vulnerable to loss of advertising dollars to online video.
More importantly, DIS is an incredible roll with its films. Frozen drove much of the upside to earnings expectations over the past year. Guardians of the Galaxy far outperformed expectations and is now another franchise. The next year plus brings another Avengers film, the first Pixar film in two years, the first of the new Star Wars films, and the just opened hit Big Hero Six. In its recent history, DIS earnings and shares have outperformed expectations when the content is humming as the company has incomparable synergies throughout its operating divisions including TV networks, theme parks, consumer products, and video games. Growth will get a further boost in 2017 with the opening of Shanghai Disneyland. DIS shares trade at well deserved premium to the market and peers but remain an excellent core holding with upside of 15-20% over the next year. Showing patience against any of the temporary issues mentioned should prove rewarding.
DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. DIS is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Posted by Steve Birenberg at 03:09 PM in DIS
Liberty Media Splits in Two to Drive Value Creation
The big news surrounding Liberty Media’s (LMCA/LMCK)) quarterly earnings was the split of LMCA into two companies as shareholders received one share of Liberty Broadband (LBRDA/LBRDK) for every four shares of LMCA/LMCK.
LMCA/K now is dominated by its 57.5% ownership stake in Sirius XM Satellite Radio. Sirius now represents over 7% of LMCA/K net asset value. Another 10% is a 35% ownership stake in Live Nation Ticketmaster. Sirius and Live Nation had both reported good quarterly results prior to LMCA/K’s report so there was little new information in the latest earnings report from LMCA/K. The reasoning behind splitting Liberty into two companies is so that each new Liberty more closely tracks its underlying asset value. LMCA/K trades at about a 15% discount to its net asset value, an unwarranted large discount given the lack of complexity now that Sirius dominates the asset value. Closing of that discount and continued 20% growth in cash flow at Sirius should produce a superior return for LMCA/K shareholders over the next year. LMCA/K shares are unchanged this year and catch up move now that the split is complete should take place. Future plans for the stake in Sirius – a possible merger or spin-off could become clearer at Liberty’s analyst meeting later this month. We plan to attend.
LBRDA/K holds a 27% stake in Charter Communications (CHTR) and a few other assets. CHTR represents 95% of the net asset value of LBRDA/K. CHTR has been leading cable industry growth this year and is poised for continued gains after it sells, swaps, and buys subscribers from Comcast post the completion of the Comcast-Time Warner Cable merger in the first half of 2015. LBRDA/K trade at a 9% discount to net asset value which I expect to grow nicely as CHTR continues to operate well and then benefits form the transactions with Comcast. Additional upside will come from a rights offering of LBRDA and LBRDK shares coming in December when shares holders will receive for every five LBRDA and LBRDK shares entitling purchase of additional shares at a 20% discount. Northlake intends to exercise those rights and increase ownership of LBRDA and LBRDK in client accounts.
LMCA, LMCK, LDRBA, and LBRDK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. LMCA, LMCK, LDRBA, and LBRDK are net long positions in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Posted by Steve Birenberg at 02:55 PM in LCAPA
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