How to spot hot entertainment stocks: investing in glamour industries can be risky, but it's sure more fun than watching widgets - includes tips for selecting stocks

Black Enterprise, June, 1994 by Gracian Mack

Investing in glamour industries can be risky, but it's sure more fun than watching widgets. YOU CAN'T SING. YOU DON'T dance. And your mama don't rock |n' roll. But, entertainment insiders say that by investing wisely, you could become one of the biggest-earning second bananas on the bill.

"It really is an exciting time for the [entertainment] industry," says Vernon Brown of V. Brown & Co., a money management firm in White Plains, N.Y. "On the one hand you have an explosion of technology, and on the other you have an explosion of mergers and joint ventures. When two or more of these companies come together as a successful fit, not only will they make investors money today, they will be situated to play an important and profitable part of the future," he adds.

According to the Department of Commerce, Americans spent approximately $340 billion having fun last year. The driving force behind that leisure spending has been baby boomers--the generation of buppies and yuppies who have never fought in a "real war," who have never faced economic depression and who are always ready to play.

The consensus among several knowledgeable African-American portfolio managers is that, while consumers dropped nearly $20 billion at theme parks and vacation getaways last year, the real ride is in three industry sectors. The television and movie sector (which includes cable, motion pictures, video and record production and publishing) cast $ 137 billion against the total figure for spending. Toy and gadget jockeys rode hard enough to ring up $131 billion. Meanwhile, back at the casinos, one- and two-armed bandits collected $28 billion from feckless gamblers.

Those figures all reflect money spent in a one-way proposition--gone from your pocket. Don't worry about it. That was yesterday. The investment climate today, however, will allow you to kick up your heels and make money at the same time.

"Portfolio managers have been switching out of long-term bonds for the past six to eight months. They are moving into shorter-term bonds, cash or undervalued stocks," says Rubye Nasser-Norsig, a financial consultant with Merrill Lynch, Pierce, Fenner & Smith in Mesa, Ariz. "The idea is to remain very conservative and pick good quality."

Brown, who manages high-end portfolios, agrees with Nasser-Norsig, adding that chasing glitzy entertainment stock riches should be grounded with a balanced portfolio. "I would recommend that 50% to 60% should be in stocks, about 20% in bonds and the balance in tax-free municipal bonds," says Brown.

While investors moving from mutual funds and bonds into individual stock purchases may see entertainment investments as yellow bricks on the road to all their investment dreams, it is important to acknowledge that the industry is speculative and anything could happen.

During the first quarter of the year, many investment opportunities were overshadowed by the media hype created when New York City-based cable TV powerhouse, Viacom Inc. (parent company of MTV and Nickelodian) paid $6.6 billion for controlling interest in Paramount Communications Inc., a New York City-based multimedia company with a strong presence in motion pictures. Interestingly, during the months leading up to the deal, Paramount was trading as high as $80.25. After the deal, a share could be bought for $43.75. At press time, you could pick up a Class A share of Viacom for $29.75, which was in the middle of its 52-week high/low range.

Assigning future value to anything based on past achievement is like predicting Oscar winners or Olympic medalists--for whatever reason, the favorites don't always win. Nasser-Norsig cautions that, because of the risk environment, a limit should be set on the amount of entertainment stocks allotted to a productive portfolio. "Generally, I wouldn't advise more than 5% of the stocks held in a portfolio be in the entertainment industry, but that would depend on whether the companies included had other [diversified] interests," she says.

"TV, film and records are clearly the front-runners of the entertainment stocks," says Brown. "Investors should look at companies and industries that have successfully combined the hardware and software sectors." That's why, he adds, "Time Warner is my best recommendation because of its cable, publishing, motion picture and record divisions. As a result of the merger, Time Warner can now develop multimedia products in-house rather than licensing or leasing them from the outside [at great cost]."

A few years back, the New York conglomerate was almost hobbled by bloated operational costs and high-yielding debt obligations totaling almost $6 billion. Shrewd financial manipulations, including equity sales and joint ventures, kept it one of Wall Street's darlings.

"Time Warner is a very sexy company. It has effectively managed what could have been a debt crisis, while maintaining a high cash flow. The [record divisions] have some highly controversial artists [like Madonna], yet they have an image that is highly respected by supporters and competitors alike. A lot of companies wish they could be Time Warner," says Nasser-Norsig.