In Q2, Big Funds Held Steady on Cable

Cable, satellite and telephone-company holdings for the four largest cable-centric mutual funds were relatively stable for the second quarter, continuing a rotation trend into large-cap holdings that began in the first quarter of the year.

But while those funds — Capital Research & Management, Capital Guardian Trust, FMR, and Janus Capital Management — continued to spread the wealth between cable and telco stocks, the second quarter appeared to be more skewed in favor of cable buys. According to quarterly reports filed with the Securities and Exchange Commission on Aug. 14 by the four funds, large-cap cable stocks were high on their “buy” lists, with several of the funds intermixing large-cap cable stock purchases with their acquisition of additional telco shares.

Capital Research, the Los Angeles-based mutual fund headed by legendary cable investor Gordon Crawford, added 34 million shares of Time Warner Inc. to its portfolio between March 31 and June 30, boosting its position in the media giant to 170.7 million shares. Capital Research, like many of the other mutual funds, also bet big on the newest cable equity to hit the market, Time Warner Cable.

The cable unit (“TWC”) went public in March and Capital Research bit hard, buying about 4.7 million shares of the stock in the second quarter, boosting its position from 715,413 shares to 5.4 million shares.

Time Warner Cable was a popular buy for the other mutual funds as well. Capital Guardian added about 500,000 TWC shares to its portfolio during the period and FMR added about 470,000 TWC shares.

Comcast was also a popular buy during the quarter, with Capital Research adding 2 million shares and FMR, the parent of the Fidelity group of mutual funds, adding 12.5 million shares.

One surprising move: long-time Comcast backer Janus actually sold 4.5 million Comcast shares in the period, reducing its position in the largest U.S. operator to about 25.4 million shares.

Any shift back into cable could be a result of historically low trading multiples and a realization that cable cash-flow growth remains in the double-digits despite growing telco competition, said Miller Tabak media analyst David Joyce.

“I’ve been telling people that these valuations for the cable companies are at pretty much ridiculously low levels when you compare their growth rate to the telcos’ growth rate and where the telcos are trading,” Joyce said.

“Cable companies are in more of a growth phase than the telcos,” Joyce added. “Even though telcos are getting into a couple of new products that bleed into the cable space, the telcos are losing dialup and they’re losing regular phone subscribers because they don’t have the growth characteristics that cable does.”

Small-cap cable companies were among the biggest sales for the funds, led by FMR, which dumped 25.8 million shares of Charter Communications during the quarter. FMR also sold off 16.2 million shares of News Corp.; 16.9 million shares of Virgin Media; 16.9 million shares of Qwest Communications; 12.3 million shares of Google; and 9.7 million shares of Motorola. At Janus, the other big sales besides Comcast were 5.3 million shares of Yahoo and 5.6 million shares of Disney.

Cablevision Systems, which announced in May that its ruling Dolan family had made a $36.26 per share offer to take the company private, was also the focus of some selling — Capital Guardian shed 972,679 Cablevision shares; FMR sold 294,200 and Janus sold 37,420.

Those sales missed the big spike in Cablevision’s share price that occurred in July, when the stock crossed $38 per share, but Joyce said that any sales during the second quarter — when the stock ranged from $30.79 per share to $36.19 per share — were probably because they believed that the likelihood of the Dolans’ increasing their offering price was low.

Time Warner Inc. (“TWX”) was the most popular cable-operator stock among the four funds — FMR bought 49.7 million Time Warner shares during the period, Janus purchased 4.1 million and Capital Research bought 34 million.

Joyce said Time Warner stock has been hit hard this year over uncertainties surrounding advertising growth at its AOL unit. That could have translated into a buying opportunity for the funds.

“That stock has definitely been on sale,” Joyce said, adding that in addition to AOL’s ad revenue troubles driving down the price to bargain levels, about 40% of the intrinsic value of Time Warner Inc. is its 84% interest in Time Warner Cable.

Satellite stocks continued to be popular with some of the large funds, but just not at the level they were in the first quarter. For example, Janus added 14.8 million shares of DirecTV in the first quarter, but boosted that position by 3.3 million shares in the second quarter. Most of the other funds maintained the status quo in satellite, with FMR selling 42,000 DirecTV shares in the period, ending June with 910,829 shares.