A Holiday Gift for Charter Communications. And Northlake Clients.

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Just before Christmas Santa delivered gold for shareholders of Charter Communications (CHTR). Santa made a first stop at Cablevision (CVC) headquarters, leavng coal, when it was announced that Tom Rutledge was abruptly leaving his role as #1 operating executive at CVC. Rutledge is the most highly regarded executive in the cable industry, a role that was magnified at CVC due to the volatile decision-making of the controlling shareholders, the Dolan family. In addition, CVC arguably faces the toughest competitive environment among major cable companies as it goes head-to-head with Verizon’s FiOS in its NYC metropolitan area markets. CVC fought off Verizon successfully for many years despite street fears and the company produced industry leading financial and subscriber results cementing Rutledge’s stellar reputation.
The specific reason behind Rutledge’s abrupt departure from CVC remains a mystery but that does not matter to CHTR. CHTR is a good landing spot for Rutledge as its current CEO was already planning to leave in February. CHTR has recently largely completed its capital spending program to upgrade its infrastructure. Major products like broadband, phone, and digital cable are underpenetrated in CHTR’s systems. CHTR faces less competition with barely any FiOS overlap and AT&T’s U-Verse at 30% of subs. Satellite is CHTR’s primary competitor but service providers lack a broadband offering, which is increasingly the premier product in cable’s bundle.
CHTR shares trade at a slight premium to its cable peers. However, the company has the potential to produce the fastest organic growth in cable in revenue, EBITDA, and free cash flow. Overall, CHTR’s investment profile is excellent. The primary risk is that the new CEO brings expectations down to lower his own bar and/or pursues acquistions rather than using free cash flow to deleverage, buy back shares, or pay dividends. CHTR is also heavily leveraged but free cash flow should handle the debt load comfortably over the next several years.
I like the CHTR story. If CHTR is able to hit current 2012 estimates, I think the shares can trade to $65-70 in 2012, up 20-30% from current prices. In the short-term, I think the shares can continue to rise as sentiment and sponsorship among analysts and investors toward the shares improves thanks to the arrival of Rutledge.
Disclosure: CHTR is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CVC and CHTR are net long positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

December Sticks With Mid Cap and Growth

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Mid Cap and Growth continue to be the favored themes at Northlake Capital Management, LLC. The latest model signals for December showed some underlying but not enough to shift the signals. As a result, for at least another month, Northlake clients using the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF).
Looking at the individual factors underlying each model, there was some movement in favor of large caps and growth. The Market Cap model saw the breadth factor shift in favor of large cap. This reflects large cap stocks performing than better than small cap stocks over the past six months. The shift in this one factor still leaves the model solidly in mid cap territory but if another factor shifted toward large cap next month a change is possible.
In the Style model, there was also one factor shifting its signal this month. Advisory Service Sentiment moved to Growth from Value reflecting less bullish sentiment among investment professionals. In the case of the Style model, the movement was in the direction of the current signal, so the Growth signal is now stronger and in territory where it is likely to stay in place for at least a couple of more months.
The current signals have a bullish bias such that they should prove accurate if the market continues its recent rally through year end. With some more hopeful signs in Europe and continued good data on the U.S. economy, a yearend rally seems plausible. The potential fly in the ointment for the models is that any rally could be led by financial stocks which are highly sensitive to developments in Europe and include in Value. The rally that began last week has, in fact, been led by financial stocks with technology, a major component of Growth, lagging the market’s gains. In a bullish environment, technology should catch up if history is any guide.
The models put in a good performance in November although the gains over the benchmark S&P 500 were minor. The Mid Cap signal saw MDY down just ¼ of 1% against a drop of almost ½ of 1% for the S&P 500. The Growth signal did a little better with IWF falling just 1/10th of 1%.
Since the current signals were put in place the performance has been mixed. Growth has done well, down about 3% vs. a drop of over 4% for the Value. The Mid Cap signal has been off with MDY down over 2% against a drop of less than 1% for the S&P 500. Mid Cap has easily beaten Small Cap with the Russell 2000 (IWM) dropping almost 6%.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. SPY and IWM are net short positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.