FOX: HOLLYWOOD'S CHEAPEST STOCK

Good things happen to those who research and buy undervalued Internet stocks, who use their brains and judgement to bet against Mr. Market. Well, good things certainly happened to those who bought Lycos at the New York open upon last week's column's strong recommendation at 50 - 52. Lycos (LCOS) surged 85% in four days after its recommendation on Monday, trading as high as 95 at NASDAQ on Friday. This was an impressive performance for this emergent digital giant, the next Yahoo of Net investing. The recommendation to buy Telecom Italia (TI) at 80 two weeks ago was also a winner, though not a once in a lifetime home run as Lycos. Telecom Italia rose to 100 and Milan is already up 9% in the first week of '99.

Merrill, Merrill on the wall, who is the cheapest media stock of them all? Fox Entertainment (FOX on NYSE), a recent IPO lead managed by the Big Bulls of Wall Street. This is one of the world's biggest media conglomerates. Never heard of them? They made the "X - files" for TV, Hollywood's "Good Will Hunting", "Titanic" and "Something about Mary". The Fox Hollywood studio tops the worldwide box offices, thanks to the $1.8 billion monster hit "Titanic" and the low budget "Full Monty". Their strategy is to produce global hits and, if the cosmopolitan crowds at Jumeirah Cineplex or the Galleria or Al Nasr are any guide, Fox's strategy is working. Yet at 23, Fox trades at only eight times cash flow versus 15-16 for its peers like Time Warner, Disney and Viacom. As Fox's CEO says " we do not make films that do not travel globe". Well, his films certainly traveled to Dubai and we are a long way from Hollywood!

But Fox not only makes global films in Hollywood. It has 198 TV stations in the States. It owns its own cable channels. It owns professional sports teams of the caliber of the Los Angles Dodgers and the New York Knicks (yes, I am a fan!). It even owns Manhattan's Madison Square Garden and LA's Staples Center. It programs shows for ABC, CBS and NBC. Its Television Network is top notch in the baby boomer/Generation X demographic range, the most coveted cohort for the world's top marketers. Ever saw "The Simpsons" or "King of the Hill" on TV? You got it. That's Fox.

It was no coincidence that Rupert Murdoch, the world's richest and biggest media lord, bought Fox from a Denver oilman billionaire in 1995. He built the Fox TV/movie franchise in the 1990's. Remember "Beverly Hills 90210" or "Home Alone" with that cute little blond boy? That was Murdoch's imprint on Fox. Murdoch is still the Chairman/CEO of Fox. Thanks to his vision and wallet, Titanic won 22 Oscars and become the # 1 box office hit of all time. A teenybopper romance on the biggest shipwreck in modern history? Well, no iceberg hit Titanic (the movie!), unlike the poor doomed cruiser that all the experts thought unsinkable! Another investing lesson here. Never believe experts. Trust your own instincts!

Let's keep things simple. Rupert Murdoch sold 2.8 billion at the recent IPO but he still owns 81% of Fox and his News Corp has the biggest distribution empire for media product ever built on the planet. TV networks, cable, golden oldie film libraries, Hollywood movie studios and books are the platforms for Fox to become the world's No.1 media conglomerate of the twenty first century. News Corp has the distribution. Fox has the entertainment product. The Internet is going to provide the platform. So, in my view, Fox is a classic Internet media stock even if Wall Street does not think of it as one set. Yet when web TV comes to every affluent home in the world, ownership of content and control of distribution will be king. Fox owns content. Murdoch owns distribution. Murdoch owns Fox and, after the recent IPO, you can become a fellow shareholder at 23.

A lot of things are going right for FOX. The boom in global movie hits. The global acceptance of American popular culture, in movies, in TV shows, in digital media. The awesome, irreversible rise of the Internet. The demographics of the Baby Boomers, the richest and biggest generation in history. How many of us grew up on Magnum PI or McDonalds, now the most popular birthday venue for Dubai kids? Fox News is a global network. It has now rolled out its TV syndication leverage. Most analysts on Wall Street estimate Fox will earn $1.2 billion in 1999. But it trades at a huge, unjustified discount to its peer group. That is fine. The best time to own cheap stocks is when they are on the precipice of a P/E expansion. If Fox rises to a peer group multiple similar to viacom, the stock is worth $28 - 30. A strategy to sell July 99 put options (25 strike) at their current 3.5 premium will yield a net cost on Fox shares of $21. Merrill Lynch, JP Morgan Securities, Salomon Brothers, DLJ, Morgan Stanley and Bear Stearns media analysts all have buy ratings on Fox and price targets in the 28 - 30 range. So if you go long Fox at 21, a 40% annual return is possible on a twelve month time horizon.

Does this profile on Fox suggest that my interest in Internet/digital media stocks has waned? No, an contraire. For me, Fox is a future post-millenium Internet stock!

Bank of America (BAC) is also now at 68, up from 60 two weeks ago when it was recommended in this column. So is Citicorp (C) at 58, up from 49. These banks are still undervalued to their international money-center peer group by any criteria other than the schizo valuation models of Mr. Market. Compaq (CPQ) continues its ascent at 46, up almost 50% from its recommended buy price at 30 - 32 only last November. All in all, not a bad track record even though I got Russia horribly wrong. But then so did the titans of Wall Street and European finance. The amazing thing about bankers is they love to lose money as a herd, whether lending money to Yeltsin's or local textile loan Ponzi schemes! The only bankers who are crucified are those who lose money in an unorthodox manner, different from the herd. Like blowing up in a futures crapshoot like Nick Leeson. What a lovely profession!

MATEIN KHALID
PORTFOLIO MANAGER
GULF AL BARAKA INVESTMENT LLC

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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