Discovery a Catch When Stock Market Gets Rough

Media stocks usually aren’t the best performers when the market is plunging, but the best one to own during a downturn appears to be Discovery Communications, according to one analyst.

In a new research note, Laura Martin of Needham & Co. warns that media stocks are generally not a good place to hide during downward market cycles. “Most media stocks have operating or financial leverage, or both,” she says. “This makes their volatility higher and in the same direction as the overall market-a bad thing in a falling market.”

Martin looked at the beta-a measure of a stock’s volatility relative to the S&P 500– of media stocks and factored in their leverage to calculate an equity beta. Using that figure, Discovery came out with a 1.0 equity beta, which means it shouldn’t do any worse than the market. Following Discovery were Scripps Networks Interactive at 1.2, Yahoo at 1.3 and Disney at 1.4. At the other end of the scale were Cablevision Systems with a 3.2 and CBS with a 2.2.

When the markets shook last week, media stocks all underperformed in the Dow and the S&P 500, falling further than the overall market with the exception of News Corp., which had already taken a beating because of the News of the World phone-hacking scandal. On days when the market was up, the content companies outperformed the indexes.

Bottom line: “Discovery Communications appears to be the best media stock to own during periods of market downside risk,” Martin says. “However, we note that owning an S&P index is often better than owning Discovery.”