Is Cable’s Hot Streak Close to an End?

After an unprecedented two-year run (2011-2013) in which their values more than doubled, cable stocks have begun to lose their Teflon coating, rising about 10% in the past 12 months. While the stocks were never expected to keep up the blistering pace of the previous two years, adding pressure on shares is the growing specter of real regulation, the first for the industry in more than 20 years. Reclassification of broadband service, cable’s fastest-growing and most-profitable business line, under utility-style Title II common-carrier regulations is not just a threat any longer, it’s coming. The only question remaining is how onerous the new law of the land will be.

Unlike in previous years, when the mere hint of additional regulation sent shares into a prolonged tailspin, cable stocks took their respective hits earlier in 2014 but managed to rebound to their previous levels in a matter of days or weeks. There are signs that immunity may be wearing thin, though. The sector is down about 5% so far in January, indicating that investors may be taking the regulatory threat a little more seriously. That could change quickly, too.

That decline could either mean that the industry is in for a rude awakening as Title II pricing regulation strangles growth, or as most investors seem to think, a Republican Congress won’t pass laws that will kill cable’s golden broadband goose. Instead, they hope, Title II will remain an option, but with a lighter touch and heavy forbearance of the more controversial aspects of the rules.

Whatever the outcome, the stocks continue to move onward and possibly upward as the expected closing date for the merger of Comcast, the No. 1 U.S. cable provider, and Time Warner Cable, the No. 2 U.S. MSO, nears. Depending on whether that $67 billion deal is approved (and there is a growing possibility it won’t be) the conditions imposed by the Federal Communications Commission and Charter Communications’ appetite for scale, the aftermath of that deal should be the consolidation wave that everyone had been waiting for, which should in turn boost the stocks. In addition, post-merger, the industry will lose one publicly traded stock from the distribution sector in Time Warner Cable, but it will gain two more — GreatLand Connections, the spinoff of about 2.5 million customers from Comcast- TWC, and Cable One, the small-market spinoff from Graham Holdings later this year.