A Little-Known Way To Profit From Billions In Campaign Spending

Brad Briggs's picture

Thursday, December 3, 2015 - 10:30am

by Brad Briggs

Back in September, I noted how comments stemming from media giant Disney's (NYSE: DIS) third-quarter earnings announcement caused a broad selloff in the media sector.

Before I update you on the situation (including a new way to profit), let's recap what I said:

      On August 4, media entertainment giant Disney reported quarterly earnings. In its conference call, management said that cable subscriptions to its ESPN network would fall about 1% in 2016.

For some reason, this seemed to shock investors, although this was not new news. The so-called "cord-cutting" movement -- that is, consumers who choose to drop their cable services in favor of cheaper streaming alternatives like Netflix and Hulu -- has been a known factor for some time.

Nevertheless, shares of Disney took a dive, and are off nearly 15% since then.

I went on to note how the loss in subscribers should have already been a known-quantity among investors and thus priced into the stock. It was also well-known that ESPN had undertaken a program of cost cutting measures, which had yet to take full effect.

Combine that with ESPN's unique position among cable networks and Disney's upcoming entry into the Star Wars movie franchise, and it was easy to see that the selling was overdone.

In short, I said investors had a rare opportunity to buy a fantastic company at a reasonable price.

The company reported fourth-quarter and full-year results on November 5. Adjusted Q4 earnings came in at $1.20 per share, compared with analyst estimates of $1.17. Revenue fell a little short: $13.51 billion compared to estimates of $13.56 billion. But the media segment saw a lift in operating income of 27% compared to the year before (to $1.82 billion), suggesting the cost cuts are working.

Now, shares of Disney are about 17% higher since my initial recommendation, and I still think Disney is a no-brainer stock to own for the long-term.

But in my initial comments, I also pointed out that not only did shares of Disney take a hit, but the entire media sector fell in sympathy.

In today's essay, I'd like to turn your attention to a lesser-known media stock that was hit during the "media meltdown": a company by the name of Sinclair Broadcast Group (Nasdaq: SBGI).

Sinclair owns and operates 162 local broadcast television stations in 79 markets across the country. These include 375 channels under the network monikers of ABC, FOX, CBS, NBC, The CW, MyNetworkTV, Univision, Telemundo and more.

My colleague Amy Calistri first caught on to Sinclair back in June. She pointed out that as the presidential race heats up, it will be the local broadcasters who will receive the bulk of campaign ad revenue:

      In 2012, roughly 87% of the spending for presidential campaign television ads was gratefully received by local television broadcasters. Surprisingly, cable got only 13% of the spending pie. Local television broadcast revenues from political ads grew 87.3% in 2012, compared with the previous presidential election year of 2008... In 2012 -- the last time we held a presidential election -- more than $6.3 billion was spent on U.S. elections, double the amount spent in 2000.

Amy went on to point out that credit ratings agency Moody's estimated that political television ad spending will grow by 20% for the 2016 election -- and that she thinks it could end up being even higher.

According to Amy, Sinclair has been quietly outperforming analyst expectations (and the S&P 500) since 2012, and now is the time to buy. She added shares to her Stock of the Month portfolio back on June 25th.

Since then, the move has already paid off. Here's what she told her readers in a special alert email on November 4:

      [Sinclair] this morning announced adjusted earnings of $0.45 per share for the quarter ended September -- a full $0.21 above Wall Street analysts' projections.

Shares of SBGI are trading up roughly 4% this morning. Currently, my SBGI holdings have a total return of 24.2% -- outperforming the S&P 500 by 19.5 percentage points. That's pretty good work for a stock we've only held since June...

A few months later, in my August issue, I saw a huge opportunity to buy more shares of SBGI after Disney reported lackluster earnings. Wall Street had sold off all local and cable broadcasters, assuming Disney's problem was an industry-wide problem. That gave us a rare opportunity to load up on SBGI at bargain prices.

SBGI has outperformed like a rock star. It's hard to believe that any stock could keep that pace. That being said, we're just heading into the heart of election season, when local broadcasters reel in Super Pac-fueled ad revenues.

Amy went on to say that while she would be trimming her position in Sinclair in order to lock in profits, she's still very much a believer in the stock's future upside potential.

I agree -- in fact, Sinclair could be seen as one of the single most overlooked ways to profit from the upcoming wave of election campaign spending. After all, people may watch a growing variety of programming through services like Netflix, but politicians and ad companies both know that a large percentage of people still watch their local news, weather or morning programming.

That's good news for Sinclair, which yields a respectable 1.9%. Risk-tolerant investors should consider adding the stock to their portfolio today.

P.S. Amy still rates Sinclair as a "buy" in her newsletter, and I wouldn't be surprised to see the stock run further from here. If you're interested in learning more about Amy and her Stock of the Month newsletter, I encourage you to visit this link.

 

Brad Briggs 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.