The major institutional funds continued their sell-off of media stocks in the fourth quarter while beefing up their positions in telecom companies. But the focus on telecom doesn’t seem to be a validation of the video strategies of some telcos like Verizon Communications Inc. and AT&T Inc. Instead, the moves seem to have been made in spite of their video plans.
The four funds — Capital Research & Management, Capital Guardian Trust, Janus Capital Management and FMR Corp. — appeared to concentrate their efforts on telecommunications companies. According to annual reports filed with the Securities and Exchange Commission Feb. 14, the four funds in the aggregate added about 86.2 million telco shares.
Three of the four funds added heavily to their positions in Qwest Communications International Inc., with FMR adding 46.5 million shares (beefing up its holdings in the Denver-based telco to 217.3 million shares); Capital Research buying 31.6 million shares (growing its position to 249.5 million shares) and Capital Guardian adding 1.2 million shares (increasing its holdings in the stock to 39.8 million shares).
Qwest, which has weathered near-bankruptcy, a failed bid to buy long-distance giant MCI Communications Corp. (won by Verizon) and insider trading allegations against former CEO Joseph Nacchio, has apparently climbed out of the abyss, reporting strong fourth-quarter earnings last week (see story, page 11).
The apparent turnaround has shown up in the stock price — Qwest shares rose 46.3% ($1.90 per share) between Sept. 30 and Feb. 14.
While the funds increased their holdings in some regional Bell operating companies, their focus apparently wasn’t on the phone companies’ much ballyhooed entrance into the video market. That is evident by the big sell-off in Verizon stock.
Capital Research sold 12.7 million Verizon shares during the period, with FMR unloading 30.2 million Verizon shares.
“The attention in the multichannel world has focused mostly on what are the telcos doing in video,” Sanford Bernstein & Co. cable and satellite analyst Craig Moffett said. “The bigger picture here is that the telcos have made big acquisitions in wireless and now commercial long distance that have served to reduce the business’ exposure to the consumer wireline business. At a time when cable investors’ focus on the RBOCs is more and more on video, RBOC investor focus is more and more on wireless and enterprise.”
Moffett added that the rotation of money from old media into new media also appears to be winding down.
That was evident in the SEC filings. Funds that bought Internet stocks such as Google Inc. and Yahoo Inc. by the bucketful in September were pulling back by year-end.
For example, Capital Research, which bought 2.5 million Google shares between June 30 and Sept. 30, sold 72,000 Google shares between Sept. 30 and Dec. 31. FMR, which bought 4.2 million Google shares between June 30 and Sept. 30, only bought 2.6 million shares between Sept. 30 and Dec. 31. While that may be in part because of the appreciation in Google shares at the time (they were trading in the $400 range in November and December) the stock has been hit hard of late.
“Remember, the data you’re looking at predates the bloom coming off the rose at Google,” Moffett said, referring to the 20.9% ($90.28 per share) decline in Google’s stock price since it reported disappointing fourth-quarter earnings Jan. 31.
Although Moffett said that Google still remains a powerful force in online advertising, “It could be we’ve seen the worst of the rotation among money managers from old media into new media already.”
Moffett added that part of the reason media investors are backing away from the sector is their fear of long-term trends.
“Cable investors and media investors are in general so nervous about long-term trends that the stocks have increasingly come to reflect trading around the quarters,” Moffett said. “Whether you meet or beat expectations in the quarter is virtually all that matters any more. And the stock prices have gotten increasingly disconnected from underlying valuations. So that a stock that guides low and beats can easily achieve a higher valuation than a stock that is growing much faster but missing its targets by a hair.”
TIME WARNER SUBTRACTIONS
The big loser in the media industry during the period was Time Warner Inc., with three of the funds dumping an aggregate of 94.8 million shares of the media giant.
Capital Research, the Los Angeles-based fund headed by media investor Gordon Crawford, led the charge in selling Time Warner stock, reducing its position by 48.4 million shares between Sept. 30 and Dec. 31. Cap Research remains one of the largest institutional holders of Time Warner stock with about 190 million shares, or about 4.2% of total shares outstanding.
The second largest seller of Time Warner shares was Boston-based FMR, the parent of the Fidelity mutual funds. FMR sold 38.4 million shares of Time Warner stock between Sept. 30 and Dec. 31, cutting its position nearly in half from 84.3 million shares to 45.9 million shares. Rounding out the sellers was Janus Capital Management (an early investor in Comcast Corp.), which sold off about 8 million shares of Time Warner during the period.
The funds also continued their sell-off in cable operators, with Janus unloading 13.6 million shares of Comcast Class A special common stock while adding 1.34 million shares of Comcast Class A common stock. FMR reduced its position in both classes of Comcast stock by 2.6 million and 1.7 million shares, respectively. Capital Research reduced its holdings in Comcast Class A common stock by nearly 7 million shares to 33.9 million shares, while maintaining its holdings of Comcast Class A special common stock at about 14.9 million shares.
Comcast was the sole operator holding among three of the funds. Capital Guardian owned one other operator — Cablevision Systems Corp. — and boosted its position in that company by 1.23 million shares in the period.
The bloom also appears to be off the rose for the direct-broadcast satellite providers.
According to the SEC filings, Capital Guardian sold 2.5 million shares of DirecTV Inc. in the period (reducing holdings to 4.97 million shares); Janus sold 3.3 million shares of EchoStar Communications Corp. (dropping its holdings to 3.5 million shares); and FMR sold 1.3 million EchoStar shares, ending the year with 22.5 million shares of the No. 2 DBS provider.
“There has been an increasing acknowledgement in the market that the DBS platform faces some real strategic challenges,” Moffett said. “It’s being buffeted by exactly the same long-term strategic challenges as the rest of the distribution sector — fear of disintermediation by the Internet and fear of the telco market entry. But there are a number of other strategic issues that are unique to satellite — the lack of a return path for wireless-only phone subscribers, the lack of a broadband pipe for doing video on demand and the lack of a triple play bundle to cross-subsidize video.”
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