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2 Ways To Profit From An Overlooked $49 Trillion Industry

Friday, December 27, 2013 8:30 AM

Advertising is everywhere you look (or listen): It's in your car, your home, and in every storefront you pass as you stroll around the block.

The industry has so much power that it affects nearly everything you see, hear and do. The sector is so potent that it drives demand, which is one of the two primary forces of every market-based economic system. As you can imagine, there are huge profits to be made by investing in this industry. Revenues are expected to reach $178 billion in the United States alone during 2013. However, many investors don't usually even think about this business when choosing investments. This is because it's so intertwined with our lives that the majority don't even give it a second thought. Just how does this sector drive economic demand?

One of the first concepts taught in economics is supply and demand. These are the underlying forces that make commerce, and even entire economies, function. Understanding this practical implication of supply and demand is one of the keys to successful investing, and even operating a profitable business.

And advertising is oftentimes not merely the grease on the economic wheel -- it can be the wheel itself.

Demand, at its core, is driven by our basic needs. Once these needs are met, demand is driven by perceived wants. Wants are created by the advertising industry. This is what gives the sector such power over the consumer economy.

Advertising from print, radio, TV, billboards and even the Web is what drives the demand side of the economic equation. It's that vital. There are more than 400 publicly traded advertising companies. These global companies produce $49 trillion in annual revenue. This is truly amazing since the world's total annual GDP is $70 trillion, according to Credit Risk Monitor (Nasdaq: CRMZ).

So with these points in mind, I want to share two dividend-paying advertising companies on the opposite sides of the risk spectrum with you today. As my colleague Amy Calistri, Chief Investment Strategist of StreetAuthority's Daily Paycheck newsletter likes to point out, it's often prudent to consider both conservative dividend payers as well as high-yield plays, depending on your needs.

1. Charm Communications (Nasdaq: CHRM)

This $176 million China-based advertising/branding agency's forward annual dividend yield of 11.6% is what first attracted me to this company.

With revenues of $168 million, Charm Communications is a major player in China's advertising industry. However, the third quarter disappointed with a revenue decline of nearly 17%, combined with a nearly 7% gross profit drop and a year-over-year net loss of $600,000.

The company points to a sudden drop in TV ratings as the primary reason for the decline. Most interestingly, on Sept. 30, a group including CEO He Dang sent a letter to the board of directors offering to buy the company for $4.70 per American depositary share (ADS). The board of directors is currently considering the offer. The stock is currently trading in the $4.35 area, leaving room for profit should the buyout take place. In addition, a counteroffer is possible, potentially pushing shares substantially higher.

Unfortunately, there is no telling what will happen. Remember, this is a Chinese company, which makes it difficult to get accurate information, so heavy caution is advised. The stock is only suited for advanced nimble investors.

2. Omnicom Group (NYSE: OMC)

This $18 billion New York City-based firm boasts annual revenue of nearly $14.5 billion.

This behemoth of an advertiser offers a forward dividend yield of 2.2% and a payout ratio of 39%. It is one of the leading advertising/marketing companies on Earth, with more than 70,000 employees and more than 5,000 clients in more than 100 countries.

Unlike the smaller Charm Communications, Omnicom posted solid third-quarter results. Worldwide revenue increased by 2.5%, domestic U.S. revenue expanded by 3.2%, and non-GAAP earnings improved by 4.5% in the third quarter, year over year. However, net income decreased nearly $8 million (2%) over the same time.

Shares are up more than 42% over the past 52 weeks, and the stock only recently fell from its 52-week high of just over $73. With shares trading in the $71 area, a breakout buy opportunity has been created.

Risks to Consider: These two advertising companies are truly on opposite sides of the risk spectrum. Charm Communications is exceedingly risky, due to being from China and the potential buyout, while Omnicom is among the largest firms in its industry, meeting full U.S.-based stock listing regulatory requirements. However, overall market risk still exists for Omnicom. Always use stop-loss orders and diversify when investing.

Action to Take --> I can suggest Charm Communication only to agile and risk-embracing investors. While large percentage gains are possible, not to mention the substantial dividend, the risks are huge. Omincom is set up to be an ideal breakout candidate. I would suggest buying on a breakout close above $73 with stops at $68 and a 12-month target price of $85.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.