Liberty in Limbo

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Liberty Media (LMCA) reported earnings last week. As usual, the numbers were meaningless as LMCA is a collection of assets including a majority stake in Sirius XM (SIRI) and meaningful minority stakes in Live Nation (LYV), Charter Communications (CHTR), and Barnes and Noble (BKS). Each of these companies had already reported their latest earnings leaving little fresh information for LMCA to disclose.

LMCA is trying to buy the 47% of SIRI they do not own. The goal is to get full control of SIRI’s massive and rapidly growing free cash flow. LMCA would use the cash flow to (1) make more investments, and (2) buy back its own shares. One plan for the cash flow was to help finance CHTR’s attempted takeover of Time Warner Cable. With Comcast now buying Time Warner Cable, that option appears off the table.

While LMCA waits for the independent directors of SIRI to respond to their offer, LMCA shares are caught in limbo. LMCA is controlled by John Malone, who can arguably be called the Warren Buffet of the media world. LMCA shares have struggled after a year of great performance given the uncertainty over the immediate future. Given his track record, I think “In Malone We Trust” is the best strategy for right now. Adding comfort during this period of uncertainty, LMCA shares are trading at about a 20% discount to underlying net asset value, the largest discount in over a year.

LMCA is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. LMCA is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Style Model Shifts to Growth

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Northlake’s Style model is now recommending Growth. As a result, client positions in the Russell 1000 Value (IWD) have been sold and proceeds reinvested in the Russell 1000 Growth (IWF). The Value signal had been in place since January 1st. During this time, IWD returned about 35 basis points vs. 171 basis points for IWF, so the latest call by the Style model was a little below average.

There was no change in the Mid Cap recommendation coming from the Market Cap model, so current client holdings in the S&P 400 Mid Cap will be held for at least another month. So far this year, the Mid Cap call has worked well. MDY is up 2.5% through February, comfortably ahead of the benchmark S&P 500 which has gained 60 basis points.

Two underlying factors influenced the shift from value to growth. First, as mentioned above growth has been performing well relative to value over the last few months. This has shifted the trend indicators in favor of growth. The trend indicators combine a look at performance over two, nine, and twelve month time frames. The second factor to shift in favor of growth is U.S. Dollar momentum. Recent weakness in the trade-weighted-dollar is favorable for growth companies. A weak dollar makes products and services sold abroad by U.S. technology, consumer, and health care companies more competitive. These industries are major components of growth indices making up
The new growth is just barely across the line from value based on the two-month smoothing used in the Style model. However, the one month reading for March is in pretty solidly in growth territory.

IWF is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.