Stock Surge in Multimedia Has Room to Ride

Wall Street, always searching for the Next Big Thing, sees this year’s version in the global communications industry.

Friday witnessed another feeding frenzy in these stocks--from the movie studios to the phone companies to the cable television equipment makers--after AT&T; said it may form a new national media network by linking local cable TV franchises.

Since spring, the nebulous concept of “multimedia” has captivated U.S. investors, thanks to an endless stream of announcements from Hollywood, Silicon Valley and local phone and cable companies. Investors are told to envision a new world of limitless entertainment and information options, all brought to your home TV or personal computer over a souped-up but as yet undefined network.

What remains unclear, meanwhile, is which companies stand to profit significantly from this supposed communications revolution--and how soon.

As usual when Wall Street latches onto a concept, investors now are bidding up stocks of virtually all of the players in the communications field. And that is reminding some analysts of the biotech craze of 1989-1991, when that industry ranked supreme as the Next Big Thing--until the stocks abruptly collapsed in 1992.

Are communications stocks headed for a similar fate? Many analysts insist that it’s too early to categorize multimedia-related investing as overheated. They say investors are only beginning to catch on to the communications industry’s potential. They also note that expanding communications represent a global story--and one that American firms dominate.

Nonetheless, investors should realize that the bull market in these issues has been running for quite some time.

The Fidelity Select Developing Communications stock mutual fund, for example, rocketed 61.4% in 1991, 17.2% last year and is up 27.9% so far this year. The average general stock fund’s gains in those periods: 35.6%, 8.9% and 8.2%.

Still, communications stocks’ bull market so far pales in comparison with biotech’s rally in that industry’s heyday. The Fidelity Select Biotechnology zoomed 44% in 1989, 44% in 1990 and a stunning 99% in 1991.

Whether communications issues can or should reach the level of froth that characterized biotech is debatable. But the communications-stock bulls argue that the slower pace of their rally suggests there is considerable upside left in the stocks.

Michael Mahoney, manager of the GT Global Telecommunications stock fund, argues that the number of communications issues that have rocketed out of sight this year is perhaps 10% to 12% of the total industry universe.

The rest, he says, “have done well, but I don’t think they’re ahead of their fundamentals.”

Mahoney also notes an important difference between biotech in its glory days and the communications industry today: The majority of biotech companies weren’t profitable during the stocks’ streak (and still aren’t). In contrast, most communications companies are already making money, so the stocks have a solid underpinning.

Indeed, a strong argument for investing in the communications field is that many of the major players are established companies, such as AT&T;, cable TV leader Tele-Communications Inc. and Hollywood giant Paramount Communications. Their futures could be enhanced by the multimedia explosion, but in the meantime, their basic businesses are healthy enough on their own.

What no one yet seems to be focusing on, however, is that there will surely be losers as well as winners in communications, as national and global information highways are constructed and made easily accessible. Ultimately, the networks that offer the best value for the money will dominate; others will fade away.

Likewise, the top-quality suppliers of entertainment and information will undoubtedly dominate even a world of 500 cable TV channels. While information options will mushroom, there still are only 24 hours in a day--and for most people, dollars they can spend on new services will be limited.

Bruce Ryon, multimedia analyst at consulting firm Dataquest in San Jose, says most consumer surveys about enhanced entertainment and information options via TV or home computers aren’t encouraging. “Most point to the idea that people won’t pay a whole lot more than what they’re paying now” for cable TV, Ryon says.

But other experts warn that it’s a big mistake to underestimate the additional usage potential of the future information networks.

Mario Gabelli, a well-known New York-based investor whose specialty is entertainment stocks, contends that when the cable TV industry was in its infancy in the early 1970s, critics said even 35 channels would be far too many.

That was woefully shortsighted, of course. The point is, Gabelli says, the information market will surely become more fragmented as consumers’ options expand, but giving people more of what they want is certain to increase their overall use of the information highway--and thus the profits of the network providers and the information suppliers.

For the average investor, what’s the best way to make a bet on multimedia’s potential? First off, realize that most general stock mutual funds will have at least some investment in communications companies, because the industry is already so huge.

To make a more concentrated bet, you can invest in funds that target these stocks. Some options:

* Telecommunications-based funds. These funds, including GT Global Telecomm, Fidelity Select Telecomm and Seligman Communications, invest primarily in local and long-distance phone companies and in the firms that supply telecommunications equipment.

The GT Global fund, for example, now has 35% of its assets in phone stocks, 12% in wireless communications stocks, 11% in telecommunications equipment makers and the rest in a grab-bag of ancillary stocks, manager Mahoney says.

His holdings include Hong Kong Telecomm, Motorola, AT&T; and Germany’s Mannesmann, a play on cellular phone use there.

The Seligman fund is currently more focused on specific technology plays in communications, says fund analyst Arsen Mrakovcic. Its major holdings include Xyplex and Lattice Semiconductor, both of which supply equipment used to upgrade communications networks’ capabilities.

* Programming-based funds. Rather than bet on the information highway itself, some experts believe the smarter play is the software providers--the studios and other programmers that will supply the information and entertainment for the networks.

The Gabelli Value fund, for example, has more than half of its assets in software providers such as Paramount, Liberty Media and Viacom (which owns MTV).

Other software-focused funds include Fidelity’s Select Leisure and Select Broadcast and Media.

Betting on Communications

Here are eight mutual funds that either specialize in communications stocks or have a large portion of their assets in that industry.

Total return: 800 Fund 1992 1993 phone line GT Global Telecomm. A +4.9% +32.9% 824-1580 Sm. Barney Shear. Telecomm. Growth A +19.6% +31.4% 544-7835 Fidelity Select Telecomm. +15.3% +29.8% 544-8888 Fidelity Select Developing Comm. +17.2% +27.9% 544-8888 Seligman Communications +18.7% +25.4% 221-2450 Gabelli Value +12.7% +23.8% 422-3554 Flag Investors Telephone Income +12.4% +18.2% 767-3524 Montgomery Global Communications NA NA 428-1871 Average U.S. stock fund +8.9% +8.2%

NA--not applicable (new fund)

Except for Montgomery, all of these funds have upfront sales loads. However, the GT Global and Smith Barney funds also are available without an upfront fee, though they have back-end redemption fees.

Source: Lipper Analytical Services