Wells Fargo offers tactical ideas for media/cable investments amid volatility
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Communications stocks have suffered through a very stormy 2022, in concert with tech volatility - leading Wells Fargo's Steven Cahall to switch into tactical mode for ideas coming out of the first-quarter earnings season.
Investors are looking for ways to navigate a shaky market, and Cahall offers up prospects to consider among media and cable stocks for those whose goals include capital preservation, as well as those seeking some alpha generation.
When it comes to preserving capital, the focus is on solid cash flows, a low risk of negative revisions (especially from recession), and high-quality management, Cahall writes.
That leads to ideas like Sirius XM (SIRI), a stable business where the multiple isn't likely to expand sharply but downside risk is limited; World Wrestling Entertainment (WWE), where downside risk is limited with its rights revenue set and live-entertainment indicators tracking well; Nexstar Media Group (NXST), where great management is leading into a massive political cycle; and IMAX, insulated from theater-window debates by blockbuster focus, and working in the counter-recessionary moviegoing business.
As for alpha generation, those investors looking for upside should look to stocks that have positive catalysts that can either deliver upside to estimates or shift the narrative, Cahall says.
That includes some streaming gatekeepers in Vizio (NYSE:VZIO) and Roku (NASDAQ:ROKU). "While there are near-term concerns on both ad spend (recession) and sell-through (supply chain), we think the introduction of AVOD onto Netflix and Disney+ is too big to ignore," he says. They also represent "massive" unmonetized time, so that should mean lifts in average revenue per user ahead.
Streaming also leads to positive ideas on Paramount Global (NASDAQ:PARA) (PARAA) and Walt Disney (NYSE:DIS), where Cahall likes the potential upside to subscriber addition estimates at two names who already have some of the highest forecasts in that area. Meanwhile, on Spotify (SPOT), he doesn't have a great feel for the June Investor Day but "we honestly don't think sentiment can get any worse."
The flip side of alpha generation is stocks to avoid or short, due to potential negative catalysts. There Cahall names Netflix (NFLX), which despite already being "beaten up" could face more negative revisions ahead in a rebuilding year; Comcast (CMCSA), where valuation support may be "off the table" as NBCUniversal looks unsure how to position for the future; and cable as a sector (which includes names like Charter (CHTR) and Altice USA (ATUS)). Cable is generally counter-recessionary, but "the wall of worry around Internet net adds and additional competition is too high."