8-16-09 - Surge in Auto Ads Makes Cumulus Media (CMLS) Perfect

The blog http://theperfectstock.blogspot.com is back with another perfect stock selection. I've gotten a lot of positive feedback from the post prior to the last one regarding the selection of Lee Enterprises (LEE). This newspaper stock is up 88% since it was posted 3 weeks ago. With the success of the LEE, I've decided to stay with the media sector because the group as a whole is undervalued and red hot. However, this choice focuses on radio media. Cumulus Media (CMLS) is the next perfect stock.

Cumulus Media Inc. (Cumulus) owns and operates FM/AM radio station clusters serving mid-sized markets in the United States. Also, through its investment in Cumulus Media Partners, LLC (CMP), the Company also operates U.S. radio station clusters serving large-sized markets. As of December 31, 2008, Cumulus owned and operated 315 radio stations in 59 mid-sized United States media markets and operated the 32 radio stations in nine markets, including San Francisco, Dallas, Houston and Atlanta that are owned by CMP.

News

I'm a bit of a sports junky, so I listen to a lot of sports radio on my way to and from work. As I was driving, I made a mental note to myself that there sure were a lot of auto ads during the commercial breaks. After doing a little research I realized that this revelation was a critically positive element in the near term success of radio media companies. The Auto sector is the nation's biggest advertiser, but they trimmed there first-quarter spending by 28 percent to $2.31 billion from $3.22 billion in the same period last year, according to TNS Media Intelligence.

Confirmation of my thoughts came last week in the latest quarterly report provided by the large radio conglomerate CBS Radio. They see revenue improvement in the third and fourth quarters of this year, led by a resurgence in automotive advertising. The government's cash for clunkers program has been one of the main catalysts. Often times the market will take information from the major players and apply it to the entire sector. This news has and will continue to push the radio stocks higher.

Technicals

See below for a 5 year chart of CMLS




As you can see, this stock has been in free fall the last 5 years. We're talking about a 90% decline over that time frame. This chart mirrors the results of practically every publicly traded radio company. When you consider the fact that there has been no bankruptcy talk and CMLS reported an eps a week and a half ago of 35 cents, one would have to think the downside at this point is limited. However, the upside is huge.

Let's take a look at a more recent chart of CMLS. See below for its 3 month chart.


.


As you can see, the nice cup handle breakout has resulted in a move significantly higher the last two weeks. However, the past few days, it has given up some gains. In my opinion this is perfectly normal after such a significant run-up. I believe that this is a pullback rather than a start of a trend downward. Friday marked what very well could be the end of that pullback. The stock began the day down over 20%, but reversed intra-day and finished down less than 3% on average volume. Also, several of the other radio stocks continued to move higher. Traders will take note of this reversal and see it as bullish.

Change in Sector Sentiment

I have never known radio stocks or media stocks in general to be "stock market darlings". Typically, these feelings are left to high growth sectors like Technology and Biotechnology. However, media companies have finally made the adjustment of significantly reducing expenses to offset the fallout of a slumping economy. With revenues having already bottomed and things beginning to look positive again, their profit potential is pretty staggering. A lot of these companies are currently trading at annualized forward PE of around 1. These ratios are just too good to be passed up by value investors and far exceeds any growth story that I can think of. Also, I've noticed in several of these stocks that groups like Goldman Sachs are beginning to take positions. The sentiment is definitely changing.

Sector Rotation

I talked in great length about the significance of money rotating into new sectors on the LEE post. So, I won't elaborate further. However, it is clear to me that a similar pattern is taking place with the radio stocks. Every one of these stocks has recently seen significant gains. The newspaper stocks have been consistently moving higher for around a month now. The radio stocks only began to move two weeks ago. I'm expecting the surge to continue.

Conclusion

We are still seeing some investment opportunities of a lifetime in some severely beaten down sectors. The stock market is a forward think tool. Evidence of an uptick in revenue in the radio stocks is already available. The jump in auto advertisements is the most notable reason for the turnaround. If you wait to see proof in the numbers, you'll miss the significant gains sure to come in the meantime. I picked Cumulus mostly because investors/traders have already taken profits from its initial push. To me, it looks the most ready to make its next move higher. However, all the radio stocks are good. I also like ROIAK, ETM, and EMMS. CMLS currently sits at $1.36. I firmly believe $2.50 -$3.00 per share will be reached in the very near future with the potential to go much higher. Cumulus Media (CMLS) is the next perfect stock.