I sold all client and personal positions in Time Warner (TWX) on Thursday morning. The shares had rallied 39% since re-opening for trading following the completion of the spin-off from Time Warner Cable (TWC) on March 27th.
Most of the TWX owned by Northlake was purchased in August 2008. Adjusted for the split from TWC, those shares incurred a loss of 26%. Another round of TWX was purchased in November 2008. This buy proved timely and the shares were sold for a 27% gain. Clients who purchased in both instances lost about 11%. Given the market rout since mid-September 2008, TWX ended up being a satisfactory investment. The stock did better than the other major media companies during these time frames.
Media stocks have been unusually strong since the market began its rally in early March. TWX moved first thanks to the value realized and improved balance sheet resulting from the restructuring. In the past two weeks, the media stock rally accelerated as most major companies reported first quarter earnings. Earnings generally beat lowered expectations and management commentary indicated that key media fundamentals in advertising and DVD sales were stabilizing.
The media stock rally may have peaked this morning following News Corporation’s quarterly earnings report after the close on Wednesday. The stocks shot up as trading opened Wednesday in response to comments from Rupert Murdoch that “the worst is over” and that “in some businesses revenues were healthier.” Rupert has been unusually bearish for the past year so his comments were well received by recently more bullish investors. Coming on the heels of more optimistic comments form Disney (DIS) CEO Bob Iger when his company reported on Tuesday afternoon, media stocks were once again in vogue.
The rebound in TWX shares allowed me to sell the stock at 13 times estimated 2009 earnings and 6.9 times operating cash flow. I think this is a full and fair valuation given the still weak economic environment and uncertain timing of a return to growth for advertising. To see TWX or other major media stocks move significantly higher requires an upturn in fundamentals by the fourth quarter of 2009. I think that is quite possible but getting from here to there smoothly is unlikely. As a result, selling TWX and looking for a better entry point on it or other media communications over the next few names is the correct strategy.
The sale also fits my view of the market. I have been regularly commenting in emails, blog posts, and the Twitter feed that I thought a sharp pop above 900 on the S&P 500 could be the top of the current rally. The fact that the move occurred this week when earnings season winds down, the stress tests results are released, and the monthly employment is due created a fundamental backdrop to the prices in my market outlook.
Over the past few weeks as the market has rallied I trimmed positions in Discovery Communications and Apple, sold the holdings of NII Holdings and Time Warner, and swapped some of the aggressive index ETFs purchased in March for the less volatile S&P 500. Portfolios are now cautiously positioned allowing for buying on pullbacks or selected new investments if economic fundamentals are truly turning up.
Disclosure: AAPL and DISCA are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts.