All Northlake client positions in DirecTV (DTV), including those in my personal accounts, were sold this morning. DTV proved to be a very successful investment having been sold for a gain of 84% and held for just short of 14 months. The original purchase was Liberty Media Entertainment, which restructured, merged with DTV, and ultimately DTV shares were spun off.
The reasoning behind the sale of DTV is twofold. First, I am nervous about the increasingly mature cable and satellite TV business. The last several quarters have seen sharp slowing in subscriber additions for all providers and I am fearful that DTV may miss on its subscriber numbers when it reports earnings next week. I also worry that price competition among providers will pick up offsetting gains from selling higher value added services like high definition and video on demand.
Second, I have been looking for sale candidates in order to build cash reserves given my more cautious view on the stock market upside in the second half of 2010. I am not outright bearish but I feel the risk-reward trade-off is only neutral and shocks to the market remain possible as long as the economic data continues to be sluggish. A larger cash reserve provides clients with downside protection and greater opportunity to take advantage of sharp market declines with new ideas.
There are several risks in selling DTV. The company is very strong financially and likely to buy back about 30% of its shares in the next 18 months. DTV is also a long rumored takeover candidate for AT&T or Verizon. On the fundamental side, I could be wrong about DTV’s subscriber growth as satellite companies may be gaining share at the expense of cable and telco.
Disclosures: DirecTV is a hedged, net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager, partial owner the Funds’ investment management company, and has personal monies invested in the Entermedia Funds.