The winner of the Archegos debacle

Credit Suisse down 14% makes sense.

They’re about to take a multi-billion dollar hit.

So is Nomura bank of Japan thanks to Bill Hwang.

But what about the stocks Hwang unloaded?

The ones he sold just to raise money?

Shouldn’t they have recovered already?

Angry Season 1 GIF by Friends

ViacomCBS (VIAC) definitely won’t.

But Discovery Channel (DISCA) could be a pink diamond.

Here’s why.

Revaluation of Viacom

Who wouldn’t want to pick up ViacomCBS after it halved in a matter of days?

But once you start adding more shares into the mix, things get murky.

Possibly at the worst time possible, Viacom launched a $3 billion equity offering to fund its streaming business.

The announcement means Viacom will increase its total share count by around 5%.

So the initial selloff of 11.6% seemed a bit overdone but reasonable.

The Discovery Channel Disconnect

Why then did Discovery Channel fall in a nearly identical fashion?

That boils down to a concept known as similar stocks or sympathy trades.

You see, both companies operate similar businesses. 

And once investors price in their relative performance, the stocks tend to trade together.

Let’s put this in perspective.

The correlation between two stocks ranges from -1 to +1.

-1 means the stocks move in exact opposite directions, 0 means they move independently, and +1 means they move in the same direction.

Since March of 2020, Viacom and Discovery hold a +0.9481 correlation on a monthly basis.

Essentially – they were the same stock.

So, when Viacom took the initial drop, so did Discovery Channel.

They won’t stay that way forever

High correlations like this exist for short-periods, months really. But, fundamental data will change that.

As these companies get through several rounds of earnings, investors will begin to price these differently.

And to some extent, they already have.

Viacom is down over 50% from its highs while Discovery Channel is down only 42%.

And the recent drop isn’t exactly unwarranted either.

Using a standard valuation metric, price to earnings ratio (AKA P/E), Discovery Channel was near 24x while the Broadcast Radio and Television industry sat at 15.54x.

Now, they’re down near 12.84x.

So the question you have to ask is whether they’re better than, worse than, or comparable to the industry average.

DISCA flies under the radar

As you would expect, search volume spiked for Viacom recently. 

But what’s unusual is how little search volume picked up for Discovery Channel.

Our TrackstarIQ data shows the enormous gap between the two.

To be fair, pageviews are up around tenfold for DISCA. But that pales in comparison to the nearly 50x increase for VIAC.

The bottom line

Investors may have overshot this one to the downside with Discovery Channel. While the broader markets are certainly frothy, this new price level for DISCA puts it at a fairly attractive discount.

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