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December 27, 2007

Selling Comcast. Buying News Corporation.

Partially driven by tax considerations, I sold Northlake's entire position in Comcast yesterday. I used the proceeds to purchase a full position in News Corporation. I completed this trade across Northlake's entire base of separately managed client accounts and in my two main personal accounts.

The Comcast long proved to be disastrous. My analysis of the company's fundamentals and the stock market's likely reaction proved wrong. I bought the position last July at more that $27. It was a 3% for most accounts position so it cost clients about 1% relative to the S&P 500 benchmark. Ouch. I’ve chronicled repeatedly why I was long Comcast and why I think the stock is undervalued at these prices. I still believe the shares are undervalued but barring a dramatic action by management I don’t see the potential for a significant rebound (>20%) in the next six months. Current fundamentals aren’t nearly as bad as the stock price implies but they are weak relative to Wall Street expectations and risk remains that there is one more disappointment in operating metric or capital spending guidance.

On the other hand, fundamentals at News Corporation are very positive. 1Q08 results are already in the books and strongly suggested that estimates are too low. When Rupert Murdoch refused to raise guidance due to concerns about the economy, the shares sold off as the implication is that estimates for the remainder of the year are too high. I think this reasoning will be proved wrong and we will find out within the next six weeks when News Corporation presents at a major sell side conference and then reports its 2Q08 results.

Simply put, I think News Corporation is similarly undervalued to Comcast but it has positive operating momentum and a recognizable catalyst. Add in the tax loss benefit against gains I’ve realized this year in my market cap and style rotation strategies and on position trimming in Apple and Central European Media Enterprises and the swap from Comcast to News Corporation makes sense.

I’d like to reiterate that I think Comcast remains cheap and oversold at current prices. My investment strategy limits the number of long positions I can maintain at any point in time. Something had to be sacrificed. No doubt it will prove to be a sacrifice to the trading deities as well so you can hold the emails noting that I threw in the towel at the low that are sure to come my way when Comcast is trading in the low $20s.

Posted by Steve Birenberg at December 27, 2007 08:02 AM in Comcast