Media Mutual Funds?

SAN FRANCISCO – When it comes to old-line media stocks these days, reading the business news might seem a lot like perusing the obituary page. Cause of death: online upstarts.

But at least some veteran mutual fund managers believe the reports of the demise of established media are greatly exaggerated. Instead, they're researching newspaper chains, television networks and cable programmers they consider deeply undervalued.

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"The quality of these businesses, which in many cases are irreplaceable, and the ability to grow future cash-flows are underappreciated by the market," said Hersh Cohen, who manages the Smith Barney Appreciation Fund (SHAPX) with Scott Glasser, in an e-mail response to questions.

How underappreciated? Media is even more disliked than technology. For the five years through Feb. 16, the media sector lost 5.9% annualized compared with a 5.1% decline for technology hardware stocks, according to investment researcher Morningstar Inc.

You can still find subscribers to the sector's long-term prospects, though, mostly among value-conscious managers of large-capitalization stock funds whose investment style and decisions have lately been out of favor.

Using Morningstar data, MarketWatch looked for well-regarded funds with at least twice the portfolio exposure to media stocks as the sector's 3.5% allocation in the Standard & Poor's 500 Index (SPX).

Among them: longtime media-stock bull Wally Weitz. About 27% of the $3.1 billion Weitz Value Fund (WVALX) was in media-related shares as of Dec. 31. Among the top 10 holdings: cable-television giant Comcast Corp. (CMCSA) (CMCSK) , media conglomerate Liberty Media Corp. (L) and publisher Washington Post Co. (WPO)

Weitz buys shares of companies selling at a discount to his estimate of intrinsic value, or what a buyer might reasonably pay for the entire business. To find bargains, Weitz focuses on a company's free-cash flow — money in the bank. On that basis, Weitz told fund shareholders in a December letter, Comcast "can sell 50% higher over the next two to three years."

About 17% of the Oakmark Fund (OAKMX) is given to news and entertainment providers and distributors. Viacom Inc. (VIA) , Time Warner Inc. (TWX) and Walt Disney Co. (DIS) are among the 10 largest positions.

Bill Nygren, who runs the $5.9 billion portfolio with Kevin Grant, said the case for these businesses is straightforward: "Regardless of how content gets distributed, demand for content will continue to grow. Whether people watch on iPods or cell phones or the Internet, the provider will get paid for it."

While Nygren said he prefers the producers of original programming to companies that disseminate these shows to subscribers, "distributors like Comcast and DirecTV Group Inc. (DTV) are selling at pretty deep discounts to the providers, so we also find them attractive."

The investment team at Neuberger Berman Guardian Fund (NGUAX) had about 12% of the $1.6 billion portfolio in the media sector on Dec. 31.

This concentrated fund keeps a three- to five-year time horizon for its investments, and is willing to own growth stocks the managers consider temporarily depressed, wrote Morningstar fund analyst David Kathman in a December research report. Liberty Global Inc. (LBTYA) — the 2004 spinout of Liberty Media's international operations — is a large holding, as is Liberty Media itself.

"We were delighted to get this undervalued asset," co-manager Arthur Moretti said about Liberty Global in a shareholder report last August. "We think the company can produce significant incremental revenues and earnings by adding content to its unrivaled international distribution."

Channel surfing

At Smith Barney Appreciation, Cohen and Glasser have put about 8% of the $5.9 billion portfolio into the media sector. The managers look for fallen growth-stock angels, former market darlings that have been soundly beaten down.

This strategy has led to meaningful stakes in Time Warner (TWX) and Disney. And if investors don't recognize overlooked media values, Cohen said, the companies themselves will.

"We anticipate the major catalysts over the near term will be stock buybacks," Cohen said. Increased share repurchases, in fact, was key to Time Warner's deal late Friday with activist shareholder Carl Icahn that ended a push to break up the company. See full story.

Another believer in newspapers and television is Brian Rogers, manager of the T. Rowe Price Equity-Income Fund (PRFDX) . About 8% of the $21 billion portfolio is earmarked to the sector, with sizable year-end stakes in Time Warner, CBS Corp. (CBS) , New York Times Co. (NYT) and Dow Jones Co. (DJ) , which owns MarketWatch, the publisher of this report.

"Rogers is finding value in some unusual places," said Morningstar analyst Christopher Davis in a December report. Rogers favors stocks that are cheap on a price-multiple basis, Davis added, and an emphasis on above-average dividend yield also leads to investments such as the New York Times, with a 2.3% annual payout.

Printing pressures

Investors' static reception of traditional media isn't likely to improve soon, which may only reinforce notoriously patient value-fund managers, said Dan McNeela, Morningstar's associate director of fund analysis.

"The advertising that has fed those businesses over time — those relationships have eroded," McNeela said "That has created uncertainty in the marketplace with these media stocks. The question for fund managers is to look past the current situation and see the value of the content that's being generated by these companies."

Many investment managers already have tuned in. Or as Wally Weitz said in his most recent shareholder letter: "When a cheap stock gets cheaper, we generally buy more."

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