Should You Buy Hedge Funds' 5 Favorite TV Stocks?


BALTIMORE (Stockpickr) -- Hedge fund managers must be really happy that Game of Thrones is back on. That's one explanation for the huge bet that fund managers made on television stocks in the last quarter.

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TV stocks were one of the few themes that fund managers piled into in 2014. With the exception of a few key areas such as health care and energy, hedge funds actually pared down their stock exposure as the broad market corrected at the start of the year. And television stocks are the most interesting set of the group because the theme spans several sectors; funds weren't shy about adding everything from cable and satellite operators to TV networks and studios to their portfolios last quarter.

Want to know which TV stocks the "smart money" is buying in 2014? Then pass the remote while we flip through institutional investors' latest 13F filings.

Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.

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In total, approximately 3,700 firms file 13F forms each quarter, and by comparing one quarter's filing with another, we can see how any single fund manager is moving his or her portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $19.3 trillion under management. It's early in 13F filing season still, and that means we're getting an early sneak peek at the few names institutional investors love right now.

Today, we'll focus on hedge funds' five favorite TV stocks.

Verizon Communications

Spoiler alert: Professional investors really like Verizon Communications (VZ) in 2014. Funds increased their stakes in the communications giant by more than 20.8 million shares last quarter, a buy operation that's worth more than $974 million at current price levels.

With an utterly massive fixed line phone business and an even bigger mobile phone carrier in Verizon Wireless, it's easy to forget that Verizon is also a TV stock; the firm's FiOS service is available in more than 18 million homes. Even though FiOS isn't Verizon's biggest business, television is integral to the firm's growth strategy, as Verizon courts users who will switch all of their connectivity bills (phone, cellular, TV and Internet) to one place.

While VZ has slowed its FiOS expansion because of huge fixed costs, the company has been expanding viewing options through apps. The wireless business is still Verizon's cash cow -- and while VZ arguably overpaid to acquire the 45% of the cellular business that Vodafone (VOD) owned, at least it owns Verizon Wireless outright now.

VZ's business is capital intense, but the firm is well positioned with reasonable balance sheet leverage (debt ramped up to buy Verizon Wireless). The massive wads of cash that the wireless and fixed-line businesses throw off also support a hefty 4.5% dividend yield. But the overpayment to Vodafone makes VZ the least attractive of the TV carriers on funds' buy list.


DirecTV (DTV) is a more pure-play television carrier; the firm is the largest satellite TV company in the U.S., with more than 20 million customers. Abroad, ownership stakes in Sky Brazil, Sky Mexico and PanAmericana add another 17 million high-growth names to its customer Rolodex. Funds like DTV a lot -- they picked up 3.13 million shares of the firm last quarter, boosting their ownership by more than 10%.

DirecTV has some big advantages over cable providers. Because it's a satellite network, it's scalable across the entire country, trimming network maintenance costs in exchange for higher customer setup fees. Because of its big scale, DirecTV has historically been able to set up lucrative deals with networks and content providers like the NFL, attracting high-end customers who are willing to pay more for service. On average, DTV customers pay for packages that cost 18% more than the average cable customer's service.

And while the U.S. business provides stable revenues, Latin America is DirecTV's growth engine. The downside to being a satellite provider is the fact that DTV must turn to partners to provide "triple play" packages that combine internet service and phone with television. That puts DTV at the mercy of its partners to some extent. DirecTV has boasted an attractive performance track record in 2014, and that trend looks likely to continue this summer.

Liberty Global

For cable TV investors in search of international exposure, it's hard to beat Liberty Global (LBTYA), (LBTYK). The firm owns cable networks, satellite TV operators and phone and Internet providers in more than a dozen countries in Europe and Latin America. That makes Liberty a pure-play international growth story, and fund mangers agree. Funds picked up 6.79 million shares of Liberty's class A shares (LBTYA) and another 6.68 million shares of Liberty's class C shares (LBTYK) in the last quarter.

All together, that's a $520 million bet on Liberty at current price levels.

While the cable wars are heating up here at home, Liberty owns a deeper moat in its core markets. Because Liberty owns the infrastructure that powers its utilities, the barriers to entry are extremely high for any potential rivals. To grow, Liberty has historically bought its way into new markets, and while that's given the firm an attractive posture in the market, it's also levered up the balance sheet. We'll want to see management pare down their acquisition appetite to keep Liberty's financial health in check.

Bundled services are a growing trend in emerging markets where growing middle class populations are consuming more. That's translating into a palpable growth in revenues per user in many of Liberty's markets. As that trend matures, expect to see meaningful margin growth.

AMC Networks

Mid-cap TV network company AMC Networks (AMCX) is a name that's seen a lot of overlap with Liberty Global in the past -- AMC acquired Liberty's international cable channel business in January for $1 billion. But it's AMC's business here at home that investors should be paying attention to in 2014. AMC owns a collection of cable networks that includes namesake AMC as well as We TV, IFC and Sundance channel. The firm's flagship channel reaches more than 95 million cable subscribers.

AMC Networks has had great success in transitioning to an original content broadcaster, with shows like "Mad Men," "The Walking Dead" and "Breaking Bad" all receiving huge critical acclaim and driving viewership (and affiliate fees) dramatically higher. AMC is by far the most important piece of the business, and while the firm's second-tier channels have had some programming successes of their own, AMCX acknowledges their niche scope.

From a financial standpoint, the network is in good shape, with approximately $1.5 billion in net debt. That easily serviceable debt load, coupled with a relatively low earnings multiple make AMCX look very buyable in 2014.

Hedge funds agree: They picked up 3.5 million shares of the firm in the first quarter of the year.


Last up is AT&T (T). Like Verizon, AT&T is mostly thought of as a cellular carrier or fixed line phone provider, not a TV company. But the firm has been working hard to grow its television subscriber base, up to more than 5 million customers at last count. The fact that AT&T is the largest internet service provider in the country also means that the firm also has big exposure to streaming TV content.

AT&T's U-verse triple play service is available in 22 states now, opening AT&T up to a bigger pool of cross selling opportunities. The more customers AT&T can convince to set up mobile phone service, TV, Internet and landline in one fell swoop, the bigger its margins get.

The biggest difference between AT&T and Verizon right now is valuation. AT&T has comparable subscriber numbers, but a third less debt. Considering the fact that VZ paid $130 billion -- or 70% of AT&T's total market capitalization -- for the remaining 45% of its cellular arm, AT&T looks downright cheap by comparison. A P/E multiple of just 10 and a huge 5.2% dividend yield round out the story in this stock.

Hedge funds picked up 7.3 million shares of AT&T last quarter, boosting their positions in this telecom giant by around 10%. But given the choice between Verizon and AT&T right now, AT&T looks like the clear winner.

To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.

-- Written by Jonas Elmerraji in Baltimore.





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At the time of publication, author had no positions in the names mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji

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