Batman Versus Superman Versus Stocks

I trust that you went to see the latest superhero blockbuster movie Batman V Superman on the day of its opening! Or perhaps you didn’t. But I certainly had my share of the spectacle.

In fact, I was already overwhelmed before the two and half hours movie could even start. You see, instead of enjoying the trailers like most of us normally do, I was greatly annoyed by them this time. Don’t think of me as odd just yet; I am sure you would have felt the same discomfort if you were there.

I had to sit through three superhero movie trailers before the movie started. They was Capitan America: Civil War, The Suicide Squad and X-Men: Apocalypse.  I recently saw Deadpool as well. Can you imagine seeing the same sort of movies with the same premise and (basically) the same story five times? Even just watching the movie trailers felt like I was watching the same trailer over and over.

I had very low expectations going into Batman V Superman, but the movie worked for me. Despite the low ratings from the movie critics, I am not ashamed to say that I enjoyed it.

I am sure you are aware of the resurgence of comic books on the silver screen in recent years. We are now obviously at a point of saturation for the whole superhero, good versus evil and end of the world story premise. But you need to realise that studios keep pumping them out simply because they are profitable.

This naturally leads the curious investors to think about movie studio stocks as a potential investment opportunity. If their movies are catching a major trend in recent years, how have their stocks done? And more importantly, how will their stocks do in the next few years?

Let me answer those questions for you.


The major studio stocks did well over a five year period, with 2015 being a major pullback year for most movie media stocks. But the overall trends for the studios over a five year period were nothing too special, due to the overall positive performance in stocks. You could say that the studios were riding on the stock bull market in the years up to 2015.

That doesn’t mean there weren’t any stocks that outperformed. Most major studio stocks outperformed the Dow Jones Industrial Average. Over the last five years, the Dow Jones index returned just under 50%. Twenty-First Century Fox [NSQ:FOX] returned 60%, Cinemark Holdings [NYSE:CNK] returned 78.5%, Time Warner [NYSE:TWX] returned 107% and Walt Disney [NYSE:DIS] returned 129.7%.

Remember to pay more attention to correlation than nominal percentage changes in return. Correlation is how closely things move together. All the stocks I just mentioned track the US market, they track the media sector index closely, and they track each other closely. Sure there were outperformers, but they still moved in a very similar way. That means, if the sector falls, every stock is likely to go down, with the highest-return stocks usually posting sharper falls.

What really stood out were stocks such as Netflix [NSQ:NFLX]. You can hardly call Netflix a traditional media company, and it doesn’t move like the other big players in the sector. The stock underperformed massively in 2012, before starting to pick up in 2013. Then it enjoyed a stellar rise, before pulling back like the other media stocks in early 2016.

With all that in mind, I want to turn to an article from CNBC recently. The article talks about the performance of active managers and stock pickers in recent years. A Merrill Lynch quant strategist report is quoted to explain that high level of correlation has been a defining factor for the difficulty in outperforming the market.

However, small-caps did wonderfully, with 80% of the small-cap core funds beating the benchmark. Mid-cap funds lagged, while value managers had an outperformance rate of 68%.

Now, I want to tie that back to the movie media piece. Within the movie space, we see a high degree of correlation, but we also see outperformance by the majors. Netflix, which could be viewed as a small-cap carries a completely different gene than the other stocks. But it also needs to be added that Netflix is a nice stock today because it turned out fine; there was an equal chance for it to be a bust if history had been different.

I am a strong believer in making smart quantitative and qualitative decisions in investing. Today’s media scene is partly cultural, partly technological and partly geographical (with emerging markets at heart).

Look, if you ask me to pick a winning sector for the next five years, I can’t give you a straight answer. But I know that technology is going to be a huge part, and emerging markets will too. This means some smart diversification is needed to construct your media portfolio.

You may want to have the traditional majors. They have the reach, the coverage and the budget. You may want to have small-caps to lower that correlation in your portfolio. You may want to include companies outside film, such as in advertising and video gaming, even tech companies that indirectly ‘dip their toes’ in the creative industries. If you diversify among those kind of companies, you have a higher chance of capturing the emerging trends in this sector.

Regards,

Ken Wangdong,
Editor, Emerging Trends Trader

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