I am a long-time investor and analyst in media stocks of all shapes and sizes. I like media stocks becuase the business is fairly simple, free cash flow capabilities are excellent, and US companies have an unrivavled global competitive position. Presently, Northlake’s model portfolio contains two media stocks, Central European Media Enterprises and NTL, Inc. Those stocks have performed well in the last 18 months but most media stocks have not.
As outlined in recent posts, we expected the weakness experienced by the market the last few days. Besides the poor corporate earnings, which was the catalyst we expected would cause a pullback, oil prices have spiked up again to their recent highs. High energy prices are actually part of our thesis for expecting weak earnings, as margins are being squeezed….
The Fed raised rates 25 basis points and kept its commentary relatively unchanged. The market responded with a small rally. The focus will now shift back to earnings, which we expect to kick off a pullback in stock prices. Oil as moved up to its highest levle in about a month which also presents a short-term headwind. Wednesday monring saw poor earnings from Morgan Stanley and lower guidance from Wendy’s, continuing the bad earnings news so far this week. No change to our cautious short-term outlook and cash levels in our model portfolio remain at their highest levels since Northlake opened in June.
The Dow and S&P were weak on Monday in the face of earnings warnings from Colgate Palmolive, New York Times, and PMC Sierra. Colgate fell 11%, NY Times fell 2%, but PMC actually rose 4% and kicked off a rally in the NASDAQ led by semiconductor stocks. The NASDAQ rally was a surprise but doesn’t change Northlake’s expecation for near-term weakness….
Lehman Brothers had some interesting research out this morning regarding the seasonality of stock prices as it relates to the third and fourth quarters and election years. This research supports our view posted earlier today of near-term caution followed by year end strength….
The market enters the second half of September near its recent highs after a strong rally off the early August lows. Northlake’s recommended stocks and models have performed well in the rally but we are beginning to take a more cautious view. Quarterly earnings season is about to start and…
No changes to the signals from Northlake’s Market Capitalization and Style models for September. The Market Cap model signal favors Large Cap. This model favored either small or mid cap from late 1999 through May of 2004. A Large Cap signal emerged in June but shifted back to Mid Cap in July. August and September now are both in the Large Cap camp, confirming a trend toward factors that favor Large Caps. In particular, the shift in the economy toward a more sustainable GDP growth rate favors Large Caps.
The Style Model remains firmly in Value territory as it has been since the spring of 2000 with only occasional shifts towards Growth. Value has performed very well in this time period, first as a defensive investment against the bear market, and then as the economy recovered and cyclical companies saw rapidly improving earnings prospects. Value is also favored when the economy is in a sustainable mode rather than an accelerating or topping mode.
The market staged a comback at the end of the month on low volume enabling the S&P 500 to eke out a small gain of about 3/10ths of 1%. Our models and special situations worked well last month with all four special situation stocks up and the August signals from both models working effectively.
Northlake’s Market Capitalization Model was sending a large cap signal for August. Consequently, we owned a position in the S&P 500 Spyder (SPY). SPY was up 0.2% for the month vs. no change for the S&P 400 Mid Cap ETF (MDY) and a decline of 1.5% for our small cap ETF proxy, IWM (Russell 2000).
Northlake’s Style Model also worked well in August. The model had a value signal, leading us to own a position in the Russell 3000 Value ETF (IWW). During August, IWW gained 1.0% vs. a return of -1.2% for the Russell 3000 Growth ETF (IWZ). August continues a good run for our Style Model. Since Northlake opened in June 2004, the model has had a value signal. During the three month period, our the value ETF, IWW, has gained 1.5% vs. a loss of over 6% for the growth ETF. Tech stocks have really struggled this summer which has favored the value signal.
Our special situations stocks,, which our outlined in the Research Samples link were all up in August. Central European Media Enterprises (CETV) was the big winner, gaining 19%. NTL, Inc. (NTLI) gained 4.2%, MB Financial (MBFI) gained 3.5%, and Motorola (MOT) gained 1.4%.
There was no news on CETV but my contacts suggested that a recent report by a well regarded Wall Street media analyst was gaining some traction. There also appears to be general interest in investment opportunities in Central and Eastern Europe. I concur with that and presently I am reviewing several other US listed stocks whose business is conducted in the region.
NTLI reported earnings at the start of August which were generally in line with expectations. The stock took a hard hit, however, in reponse to disappointing news from key competitor Sky. Competitive fears are the big issue for NTLI shares. NTLI rebounded later in the month as rumors of sale of the company’s tower business picked up steam.
MBFI reported solid earnings in August as well. No change to the thesis on this well run, high quality, Chicago bank. Upside from operations and future smaller acquisition exists and MBFI remains a preferred acquisition candidate for a larger bank wishing to expand in the Chicago market.
Little news in MOT during August. I feel the turnaround is in place and investors will reward the shares as new mobile phone designs are shipped on time over the balance of 2004.
Overall, a good month for Northlake’s key investments.