Netflix, Sirius Are Media Stocks to Sell

NEW YORK (TheStreet) -- As I pointed out in a recent TheStreet article, I relish market pullbacks. When the market corrects, it never fails that stocks like Apple ( AAPL) and Amazon.com ( AMZN) lead most of the ensuing rallies. And that's because they're strong companies well-positioned in multiple spaces with the ability to rapidly grow revenues for the foreseeable future.

With companies like Amazon and, to a lesser extent, Apple, you almost have to ignore near-term pressure and uncertainty to focus on the future. AMZN sports a lofty valuation for the same reason AAPL is on a parabolic move up: Investors have confidence in each company's ability to execute going forward.

I follow the media space more closely than any other. I consider Apple and Amazon part of that landscape; in fact, they dictate the on-demand, multi-platform future that continues to evolve in both audio and video entertainment. What's really great about these two companies is that they rule multiple sectors. You can call them leaders in tech, Internet, retail, e-commerce, consumer products as well as new media.

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In future articles, I will focus on the companies I consider solid second- and third-tier selections to upper-echelon stocks like AAPL and AMZN. Companies like Disney ( DIS), Time Warner ( TWX), Rogers Communications ( RCI) and Bell Canada ( BCE) sit on the second tier as always-innovative, still-growing and dividend-paying stocks. More speculative plays, such as Pandora ( P) and Madison Square Garden ( MSG) make up the third tier of media leaders. Each company on this list scores high in one or more of the following categories:

¿ Massive and/or rapidly growing revenues (all of them)

¿ Multiple, diverse streams of revenue (DIS, TWX, RCI, BCE, MSG)

¿ Multi-platform delivery of premium content (all of them)

¿ Direct control over premium content (DIS, TWX, RCI, BCE, MSG)

¿ Ubiquity (all of them, with MSG on a regional basis)

With the exception of DIS, I am long each stock on that list. I scale into them on a regular basis. I step up those buys on weakness. We'll save a deeper look into my rationale for each position for a later date. However, as I detail my bearishness for the two media stocks to sell, it will start to become clear why I like the aforementioned names.

Netflix ( NFLX) and Sirius XM ( SIRI)

Netflix and Sirius XM make for an interesting comparison. It's not because each company utilizes a subscription model and recently raised prices. Remember, I do not care what happened yesterday. And I only care about what's happening today insofar as it informs what will happen in the future. They make for an interesting comparison because, in their own ways, each company appears to have a bright future.

Consider Sirius XM. CEO Mel Karmazin presides over a company that has so much money, he has no idea what to do with it. Because he cannot find suitable acquisition candidates, Karmazin told Jim Cramer that he'll probably recommend that the company's board return capital to shareholders.

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Coupled with Sirius/XM's return from bankruptcy, rise from pennies per share, increasing subscriber base and free cash flow that paves the way for a buyback, this might seem like fantastic news. I could not disagree more. When I hear Karmazin claim that he has no use for his company's cash other than an acquisition or buyback, I run away. This is not the way growth companies in the new-media space should roll. That cuts to the heart of the problem at Sirius XM: I do not think it considers itself part of the new-media landscape. If it does, it's not competing effectively.

Karmazin considers Sirius XM a radio company. That's his first mistake. He sees the whole operation nicely positioned in the automobile, where a good chunk of radio listening takes place. Outside of the auto, Karmazin focuses on retail, where you can buy expensive and old school "receivers" to listen to satellite radio. Mobile listening and online streaming are little more than afterthoughts at Sirius XM. Karmazin has made very little effort to diversify revenue streams and Sirius XM's audience. He'll take 5% to 10% revenue growth each year, push for a buyback and walk blindly into a future that requires quite a bit more aggression and innovation.

At Netflix, the CEO is nothing short of a visionary, but, sadly, he has trouble running a business day to day and leveraging the short term for the benefit of the future. Karmazin has a cash cow in his large and loyal subscriber base, yet he refuses to plow that money into growth and innovation. Reed Hastings of Netflix, meantime, is all about growth and innovation, except he killed off his profitable high-margin DVD business last year. Now there's nothing left to finance Netflix's streaming ambitions other than secondary offerings.

In what will amount to Part II of this article, I expand on Sirius XM and Netflix's weaknesses to inform a deeper discussion of why DIS, TWX, RCI, BCE, P and MSG represent the future of new media. Look for that later this week. In Part III, I present a model portfolio that includes options positions to play the bullish and bearish convictions articulated in Parts I and II. Look for that early next week.

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