What Does the Smart Money Think of These Media Stocks Goldman Just Downgraded?

Analysts at Goldman Sachs downgraded media stocks Time Warner Inc (NYSE:TWX), Viacom, Inc. (NASDAQ:VIAB), and Scripps Networks Interactive, Inc. (NYSE:SNI) on Monday. The market isn’t particularly heeding Goldman’s advice, however, as Time Warner is up 0.75%, Viacom is up 1.71%, and Scripps Networks is up 2.17% in late afternoon trade. Let’s take a closer look at the three stocks and examine hedge fund sentiment towards them.

Concept Photo/Shutterstock.com

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 60 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. a 58% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Goldman Sachs removed Time Warner Inc (NYSE:TWX) from its ‘Conviction List’, citing concerns that internet technology will make linear TV a thing of the past. Because of the increased competition from Netflix and Amazon Prime, Goldman thinks Time Warner’s 2016 earnings per share will be $5.4, or 5% below consensus and nearly 8% below Time Warner’s own guidance. Time Warner hasn’t completely fallen out of favor with Goldman, however, as the investment bank still has a ‘Buy’ rating. The bank just doesn’t think the Time Warner’s stock has a good chance of beating the market over the next 12 months. Shares of Time Warner have done well this year, with the stock up 24% year to date.

According to our data, hedge funds were bullish on Time Warner Inc (NYSE:TWX) in the second quarter as they amassed nearly 9% of the company. A total of 68 funds reported stakes worth $6.22 billion in the last round of 13F filings, versus 69 funds and $4.6 billion respectively a quarter ealier. Daniel S. Och‘s OZ Management increased its position by 5% to 9.49 million shares, while Barry Rosenstein’s JANA Partners raised its holding by 273% to 4.67 million shares. David Einhorn’s Greenlight Capital kept its position the same at 3.78 million shares.

The investment bank downgraded Viacom, Inc. (NASDAQ:VIAB) to ‘Neutral’ from ‘Buy’ and Scripps Networks Interactive, Inc. (NYSE:SNI) to ‘Sell’ from ‘Neutral’ for the same reason as it downgraded Time Waner. Goldman fears the increased pace of cord cutting will have a substantial impact on the media companies’ bottom line. Goldman notes Scripps Networks has the highest exposure to TV ads in its peer group at 67% of revenue versus Time Warner’s 17%.

Hedge funds were mixed on Viacom, Inc. (NASDAQ:VIAB) in the time period from March 31 to June 30. Although the number of funds increased to 47 from 40, the total value of their holdings in the media stock declined to $2.25 billion (representing 10% of the float) from $2.52 billion. Donald Yacktman‘s Yacktman Asset Management decreased its position by 1% on the quarter to 9.27 million shares, while Warren Buffett’s Berkshire Hathaway lowered its stake by 32% to 5.65 million shares. Going the other way was Cliff Asness’ AQR Capital Management, which raised its stake by 44% on the quarter to 1.36 million shares.