I’ve spent the past few months repositioning the Twinleaf Small Cap Value portfolio to reflect two key investment themes.
The first is the migration of consumer media consumption and dollars to digital from both advertising and subscription.
The second is the potential for industry consolidation in both traditional and digital media in 2015.
Out of sync
Our small-cap focus has been out of favor since April 2014 as large cap names have dramatically outperformed.
This has been a frustrating period to endure as investors have seemingly ignored small caps in favor of blue chip favorites like Apple (AAPL), Disney (DIS) and Yahoo (YHOO).
In my opinion, at some point, relative value will prevail and stocks with very reasonable valuations, including several in our portfolio, will return to favor or be acquired.
Our digital media investment focus is being driven by the flow ad dollars and consumption of content (increasingly video) across multiple screens.
This is a long-term structural shift transforming the media and technology industries.
The winners
While winners and losers are difficult to forecast, I believe that it is important for investors to have exposure to this trend.
The Twinleaf portfolio includes companies that are leaders in their industry sub-segments, including automated ad sales (known as programmatic), digital video, multi-screen video and call advertising.
In my opinion, there may be considerable revenue and earnings growth from these companies as the broader trends play out.
From a potential M&A perspective, both traditional media and digital media, specifically the sub-segment known as advertising technology, could use further industry consolidation.
Takeovers
Traditional media such as television broadcasting and pay TV programming is seeing slowing growth due primarily to the siphoning of content consumption and ad dollars to digital platforms.
Here, M&A is a way to eliminate redundant expenses, often considerable. In my opinion, 2015 could see a final round of consolidation in pay TV programming.
For the sprawling digital media industry, consolidation is less about reducing overlapping expenses and more about scale, creating companies led by better management that can serve bigger customers and perform adjacent services under the same roof.
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
