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I believe ViacomCBS (VIAC) is an under the radar way to participate in one of the strongest trends in the post Covid world - the streaming of entertainment content. But it is also a defensive way (low 7x CY20 PE and 3.3% dividend yield vs the S&P at 25x and a 1.8% dividend yield) to take on this investment risk.
The streaming business of ViacomCBS includes: 1) CBS All Access, 2) Showtime, 3) Pluto TV, and 4) digital ad revenues. The crown jewel within their streaming business is CBS All Access & Showtime streaming subscriber revenues. For the full year 2020, I estimate these subscribers will generate $1B in revenues growing 50% y/y and accelerating throughout 2020. Covid has an increasing number of housebound people searching for content to stream and ViacomCBS has some of the best in the business. This includes: 1) original content like Mission Impossible, 2) live sports like the NFL, and 3) live news for these tumultuous times. I believe total streaming subscribers will grow as a result from 11M at the end of CY19 to 20M by the end of the year. Additionally, Viacom has PlutoTV, the #1 free ad supported TV streaming service with 27M monthly active users. Altogether, I estimate total streaming revenues for Viacom should be up nearly 40% from $1.6B in CY19 to $2.2B in CY20. For comparison, Netflix is expected to grow CY20 revs by 23% and has an Enterprise Value/Sales ratio of 8.4x. If I use this multiple on the total streaming revs of Viacom this year of $2.2B, I end up with a value of $18.5B for just this business. But there are clearly risks related to people cancelling their cable/satellite service, depressed advertising revs during Covid and debt levels that need to be considered. This can be reduced by shorting less well positioned cable/satellite companies and other more highly valued & levered companies affected by Covid. Given these risks, if we assume the rest of the business deserves only a 4-5x price to earnings ratio, this implies a total valuation of $40-50 per share for VIAC versus $29 where it trades today. Furthermore, with over 20% adjusted free cash flow growth to $1.5B in 2020, the risk to reward and potential upside is too compelling to ignore.
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Many investors believe in TINA (There Is No Alternative) for a valid rational for the S&P500 to go higher despite high valuations (26x PE) because of how low interest rates are in the US. However, when looking at other developed stock markets such as Europe, Germany (the largest country in Europe,) Switzerland and Japan, that have low to negative ten-year yields, they all have higher dividend yields and lower PE ratios compared to the US. China is here for comparison given they are the second largest economy but their ten-year yields are much higher and their PE is much lower.  Hedge-fund manager Dan Niles, in a note cited by Yahoo Finance this week, warned his clients way back in February that he was getting “increasingly worried” investors weren’t ready for the impact the spread of the coronavirus could have on the U.S. economy.
So Niles positioned his portfolio accordingly. Good thing. While the Dow Jones Industrial Average posted its worst first quarter ever, his Satori Fund closed in positive territory. This latest rally is being helped by pension funds selling bonds and buying stocks at month/quarter end to rebalance their portfolios over the past week. Only 9 times in 30 yrs has the difference in performance of the S&P500 vs. Bond Market Return (LBUSTRUU Index) been greater than 10% with 5 trading days left in the quarter. For example, with 5 trading days left in the month on 3/24, the S&P was down 17.2% with the bond market also losing 2.3% for a difference of 14.9%. Due in part to pension fund rebalancing, the S&P has rallied 7.3% over the past 4 trading days not including today (3/31), which is inline with the historical average of a 6.8% rally over 5 trading days. However, the average over the next 5 trading days is a loss of 1.1% and it is up only 25% of the time. On a positive note, the bond market continues to rally and is up 88% of the time over the first five trading days of the new month and gains 0.5%. (See below.)  During the Great Depression, there were 8 gains that averaged 23.6% over 52 days while the S&P lost 86.2% over 33 months. Unfortunately, these gains were followed by nine declines averaging 32.6% over 64 days. This most recent rally in the S&P is a pretty typical bear market rally.  In the days before coronavirus, when markets were hitting new highs, technology stocks were the tip of the spear. Just a few weeks ago, there were four U.S. companies with market valuations above $1 trillion, all of them tech stocks.
Those companies— Microsoft (ticker: MSFT), Apple (AAPL), Amazon.com (AMZN), and Google parent Alphabet (GOOGL)—with their fortress-solid balance sheets, are poised to come out of the downturn just as strong as they went in. But for intrepid tech investors, there are less obvious opportunities to be found amid the current carnage and chaos. To help find the best ideas, Barron’s reached out to a few of our favorite tech-focused stockpickers. Some clear themes run through their recommendations: The work-from-home revolution underlines the power of cloud computing; we all still need to be entertained, even if we’re stuck at home; and we’re still going to need broadband, now more than ever. Dan Niles Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund. On Feb. 17, just after Apple pulled its March quarter guidance, Niles tweeted that he had 50% of his portfolio short Apple, seven of the company’s suppliers, and QQQ, an exchange-traded fund that tracks the Nasdaq 100. It was a prescient call. Niles remains generally bearish on the market, but there are stocks he likes and owns, particularly around videogames. While Niles thinks the market has exaggerated the impact of a fifth-generation, or 5G, iPhone launch later this year, he sees opportunity in a less-watched product cycle: new videogame consoles from Microsoft and Sony (SNE), expected this fall. “They’re going to launch the first new hardware platforms since 2013, and everyone is stuck at home,” he says. “I like them all,” he says of the videogame stocks, including Zynga (ZNGA), Take-Two Interactive Software (TTWO), and Electronic Arts (EA), along with China’s NetEase (NTES) and Tencent Holdings (700.Hong Kong). Other Niles bets are Amazon, a beneficiary from the shift to e-commerce, and work-at-home play RingCentral (RNG), a cloud-based communications provider. Meanwhile, he’s still ready to short Apple again as the stock rallies. For one thing, he says, “I don’t know who is going to feel rich enough to buy an iPhone.” And he wonders why anyone would pay 19 times current earnings for Apple, when other hardware plays like Dell Technologies (DELL) and HP Inc. (HPQ) trade for just seven times. To read the full article please visit: https://www.barrons.com/articles/25-tech-stocks-to-buy-for-a-post-coronavirus-world-51585343434
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AuthorDan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund. Archives
June 2020
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