John Reese is founder and CEO of Validea.com and its Canadian site Validea.ca, as well as Validea Capital Management, and is a portfolio manager for the Omega American & International Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.
Over the past few years, North Americans have had plenty to worry about. From the U.S. housing collapse and associated financial crisis, to nuclear threats from Iran and North Korea, to the recent horrifying bombings at the Boston Marathon, it seems there's been one crisis after another.
Perhaps because of the stream of negative news, many entertainment companies – movie studios, casinos etc. – have been faring well, despite a sluggish economy, high unemployment and weak wage growth. People need escapes from the economic struggles, political rancour and violence, and they can find it in the products and services these companies offer.
Rapid changes in the way we access entertainment have no doubt also been at play.
The Guru Strategies I run on Validea (each of which is based on the approach of a different investing great) are finding a number of entertainment companies that have been growing at a good pace despite the sluggish economy.
Here are a few of the entertainment stocks that rate highest on my guru-inspired models. As with any quantitative screen, you should invest in stocks like these as part of a broader, diversified portfolio.
Cineplex operates 136 movie theatres with 1,455 screens across Canada. It also allows users to rent or buy videos online. The company has a $2.1-billion market cap and has taken in about $1.2-billion in sales in the past year.
Cineplex gets strong interest from my Peter Lynch-based model, which likes its strong long-term earnings per share growth rate of 26.7 per cent. (I use an average of the three-, four-and five-year EPS growth rates to determine a long-term rate.) Mr. Lynch famously used the P/E-to-growth (PEG) ratio to find bargain-priced growth stocks, and when we divide Cineplex's 17.2 price-earnings ratio by that long-term growth rate, we get a PEG of 0.64. That comes in well under this model's upper limit of 1.0.
Mr. Lynch also liked conservatively financed firms, and Cineplex's debt-to-equity ratio is just 23 per cent, another good sign.
This entertainment company is involved in the specialty television and radio markets, and also has assets in pay television, television broadcasting, children's book publishing and children's animation. The $2-billion-market-cap firm gets strong interest from the strategy I base on the writings of hedge-fund guru Joel Greenblatt.
Mr. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital (ROC). My Greenblatt-inspired model likes Corus's 10.5-per-cent earnings yield and 117-per-cent ROC. (It's also worth noting that the stock comes with a 4.2-per-cent dividend yield.)
Known for the Churchill Downs Racetrack that is home to the Kentucky Derby, this Kentucky-based firm's activities go beyond the world's most famous horse race. It operates additional racing facilities and/or casinos in Illinois, Florida, Mississippi and Louisiana, and has an Internet wagering business, an interest in the horse racing television network HRTV, and a business that provides handicapping and breeding data and publications. Last month, it announced it is acquiring Oxford Casino of Maine.
The company ($1.2-billion U.S. market cap) gets strong interest from my Lynch-based model. It likes the firm's 24-per-cent long-term growth rate and 20.7 P/E, which make for a solid 0.86 PEG ratio. It also likes that Churchill Downs has reasonable debt, with a 34-per-cent debt-equity ratio.
This diversified New York-based entertainment firm is involved in television (HBO, TNT and TBS are among its many networks), film (via Warner Bros.), video games and online content, and publishing (Time, People and Sports Illustrated are among its magazines). The company, with a $56-billion (U.S.) market cap, has taken in nearly $30-billion in sales in the past year.
Time Warner gets strong interest from my Lynch-based model, which likes its 17.9-per-cent long-term growth rate, 19.3 P/E ratio, and 1.9-per-cent dividend yield, which make for a 0.98 yield-adjusted PEG. That just comes in under the model's 1.0 upper limit.
I have no positions in the stocks mentioned above.
John Reese