"I've never been a big fan of the cable TV companies," notes Jack Adamo who admits that his latest buy recommendation for Comcast (NASDAQ: CMCSA) might indeed sound like a sell recommendation.
But, in his Jack Adamo's Insiders Plus, he concludes, "This is not a company I'm in love with, but the stock is just too cheap to ignore." Here's his rationale for buying.
"For decades the story has been that cable companies will eventually be able to scale back on their enormous capital outlays for infrastructure, and then sit back and harvest the free cash flow."
"But so far that day has always remained in the future, due to periodic system upgrades, and increased competition from satellite TV and phone companies. Even Berkshire-Hathaway's stake in Comcast did not convince me of its merits, and, in fact, capital expenditures at the these companies remains high.
"The outlook now is only marginally better. Comcast has added many new phone, internet and digital TV subscribers in the last few years, and continues to do so, albeit at a slower pace. Digital subscribers spend more, and have access to a growing number of new features that have high profit margins. "
The advisor continues, "This positive slant is somewhat offset by increased competition from phone companies and satellite TV, who've teamed up to offer packaged products similar to the cable companies'.
"Another negative currently unfolding is that the courts have ordered that cable providers can no longer make deals with apartment complexes for exclusive rights to provide TV and internet service. This should increase competition in the long run and drive down prices for all providers. Comcast gets about 10% of its revenues from these exclusive contracts.
"So far, it sounds as if I'm writing a sell recommendation, doesn't it? The reason it's not is that the market has already factored in all these negatives, and, in my view, overreacted. The stock is down about 25% in just the last few weeks.
"Comcast is still rolling out new services into areas that will require more investment, but overall, capex should decelerate. Free cash flow will rise in inverse proportion, and with it the stock price.
"The shares are slightly above $21. I think within two years it can be back over $30 for a gain of 20% or more per year. In the current hot market that may not seem exceptional, but the market can't stay this hot for more than another quarter or two; so, Comcast should finish way ahead of the pack.
"We may see a bit of tax selling in the next month or two, but I think the shares will rise anyway. Usually a broker or two wakes up after one of these major stock swoons, and their recommendation lifts the stock. Buy up to $23."
Each day, Steven Halpern's TheStockAdvisors.com website features the latest investment commentary and favorite stock picks of the nation's leading financial newsletter advisors.
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