Since Ariel’s founding in 1983, much has changed in the investment world, but our clear mission has consistently defined who we are and what we do. We began as a small- and mid-cap value manager and evolved strategically to offer three approaches—Value, Deep Value and Global—all of which adhere to our patient investment philosophy and strive to uncover mispriced companies whose true value will be realized over time.
Renewed expectations of corporate tax cuts pushed U.S. markets to record levels in November. Financial stocks outperformed all other sectors as banks are likely to be the biggest beneficiary of the proposed corporate tax reform. Smaller-capitalization banks rallied, pushing small-cap indexes, with their greater-than-20% financial allocations, higher.
A key consideration for all investment styles is disruption. Whether it is Uber, Amazon.com, Inc. (AMZN, Financial) or Tesla, Inc. (TSLA, Financial), recent headlines are dominated by industries being transformed—or even created—by evolving technology. These disruptions can present investors, especially value investors, with interesting opportunities. But careful analysis is necessary to determine whether these opportunities represent true value or just value traps.
One industry where we have identified two key disruptive trends is media. Specifically, we have been tracking the rise of digital video consumption or so-called “cord-cutting,” which garners most of the headlines, and regulatory reform. On the regulatory front, the Federal Communications Commission (FCC) recently announced some rule changes that are likely to lead to further consolidation among broadcast television stations. First, they lifted the Newspaper and Broadcast Station Cross Ownership Rule, which had restricted ownership of broadcast stations and local daily newspapers in the same market. Meanwhile, the Local TV Multiple Ownership (Duopoly) Rule was relaxed and the National TV Ownership Station Audience Cap was raised. Companies like Meredith Corp. (MDP, Financial) and TEGNA, Inc. (TGNA, Financial) seem well positioned to take advantage of these changes, which will enable them to grow market share while also taking advantage of natural synergies in the broadcasting space. In fact, Meredith Corp. announced a rather significant acquisition of Time Inc. (TIME, Financial). The general market’s reaction to the acquisition has been largely positive. The estimated $400-$500 million in expected cost synergies in the first two years, as well as the deal’s accretion, are seen as a benefit to shareholders. As shareholders, we agree but remain skeptical that the broader shift in revenue from local media to national media will pay off in the long-run.
The broader shift towards digital consumption and “cord-cutting” brings with it a different set of opportunities and risks. Cable television providers now search for ways to retain customers by providing more affordable options such as the “skinny bundle.” Content providers like Viacom, Inc. (VIAB, Financial) and Walt Disney Co. (DIS, Financial), and regional sports networks like MSG Networks, Inc. (MSGN, Financial), are under pressure to prove that customers are demanding their channels be included in smaller cable bundles. As a result, quality content and live programming are becoming more important factors in negotiating redistribution contracts. We believe that, in the end, quality content will win and that it is our job to identify what customers value the most. In our opinion, live programming, especially live sports, will always be in demand. The real question is, what is the value of channels such as Nickelodeon, ESPN and MTV?
Ultimately, we believe that disruptive industry trends will create opportunities for investors and that being able to differentiate the winners from the losers is a critical part of our research. In our opinion, deep industry knowledge is the key to successfully assessing the impact of disruption.
This commentary candidly discusses a number of individual companies, the following of which were held in Ariel’s portfolios as of 9/30/17: As of 9/30/17, Meredith Corp. constituted 2.5% of Ariel Fund; TEGNA, Inc. 2.8%; Viacom, Inc. 1.8%; and MSG Networks, Inc. 3.5%. As of 9/30/17, Viacom, Inc. constituted 1.0% of Ariel Appreciation Fund and MSG Networks, Inc. 2.1%. Portfolio holdings are subject to change. Visit arielinvestments.com for schedules of holdings. The opinions expressed are current as of the date of this commentary but are subject to change. The details offered in this commentary do not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
