Why Media Stocks Look So Ugly

Media stocks have tanked. A chart of the media conglomerates performance over the past 12 months is flat-out ugly.

They're all in the red, and all but Disney have underperformed the Dow, and it's still down about five percent over the past 12 months. CBS has performed the worst- down 39 percent in one year, Time Warneroff 32 percent, Viacomdown 24.5 percent over the past year. And News Corp is down 29 percent over the past year, a year in which it shelled out $5 billion to buy Dow Jones.

It comes down to the fact that these companies are suffering from a perfect storm. The sector is trying to reinvent itself in this digital age: working to monetize the new business of digital distribution, fighting piracy, and trying to deal with the growing popularity of DVR allowing viewers to skip advertisers messages. This just as the economic downturn hits the sector. Advertising growth is flat or down, and it's partuclarly hurting in newspaper and radio.On the heels of a Writers Guild strike, Hollywood's afraid an Screen Actors Guild strike could bring the biz to a screeching halt. And with consumer confidence numbers dismal and fuel prices high, everyone's wondering how that'll affect media consumption. Will high gas prices keep people from driving to the movies?

The biggest loser when it comes to media conglomerates is CBS--the least diversified of the group. It derives most of its revenue from ads, and Wall Street's concerned about how reliant it is on the ups and downs of advertising trends. Something to keep in mind: CBS is benefiting the most from the influx of spending on political ads; this year is expected to be the biggest campaign ad year by far.

The biggest winner among the group is Disney, which has outperformed the Dow over the past year. The Mouse House has the benefit of diversification with a consumer products division as well as the parks. And despite concerns, we haven't seen any negative economic impact on Disney's parks business yet. It helps that the weak dollar is driving international tourism.

Disney also offers advertisers the ability to really target consumers-- kids through the likes of the Disney Channel, and a valuable male demographic through ESPN. The concern with Disney is that the impact of a weak economy may lag, and we may see it in several months. We'll see.

What are investors looking for? In addition to diversification, that ability to target viewers helps advertisers feel like they're getting their money's worth. Wall Street gets that cable channels enable that--which is why they pay close attention to the media giants cable divisions. It's also why Discovery Communications and other cable plays are getting so much attention.

Wall Street also wants to see some reassurance that these companies are figuring out the digital future, making something of these new digital businesses. That's why there's so much attention paid to how News Corp is monetizing MySpace. Digital revenues are still small potatoes, relatively speaking. But they are the future.