Why is Stagwell, Inc. (STGW) the Worst Advertising Stock to Buy According to Short Sellers? - InvestingChannel

Why is Stagwell, Inc. (STGW) the Worst Advertising Stock to Buy According to Short Sellers?

In this article, we will look at the 10 Worst Advertising Stocks To Buy According to Short Sellers. Let’s look at where Stagwell, Inc. (STGW) stands against other worst advertising stocks.

Overview of the Global Advertising Sector

Advertising agencies have profited from per capita disposable income, increasing consumer spending, and corporate profit in the past few years. Although advertising expenditure fell after the outbreak of the COVID-19 pandemic, industry revenue in 2020 rose with companies demanding creative services for their pandemic-focused promotional campaigns. Corporate profit bounced back after 2020, allowing agencies to monetize the exponential release of pent-up demand as companies and businesses scrambled to target a specific customer base: one with increasing disposable income.

According to estimates from IBISWorld, industry-wide revenue in the advertising sector has been growing at a compound annual growth rate of 2.7% over the past five years. It is expected to reach $70.1 billion by 2024, increasing by 1.9%. Profit is also anticipated to grow by 6.6%. According to a report by Mordor Intelligence, the online advertising market is valued at $257.97 billion as of 2024. It is expected to increase to $431.76 billion by 2029, growing at a compound annual growth rate of 10.97% in the forecast period.

North America is the largest market in the sector and is also the fastest-growing in the world. The increasing use of digital devices and social media has caused an exponential boom in the online advertisement sector, becoming a critical component of marketing strategies for companies across the globe.

Spending in the Advertising Sector

Spending in the advertising industry, which determines the fate of publishers, is also determined by the state of the economy, consumer confidence, and advertisers’ outlook. Advertising giants have talked during earnings calls that while the advertising market is not at its best right now, it does appear to be recovering.

This recovery is taking place in areas such as food and technology, which joins strong performance in healthcare, pharmaceuticals, and beauty care. Companies that are active in programmatic advertising (data-driven user targeting through ads), have also seen programmatic revenues surge while broader advertising revenue decline.

US Elections and the Advertising Industry

US political campaigns take over the advertising landscape during an election season, setting the stage for a number of challenges for non-political advertisers. As such challenges only seem to grow with each election cycle, 2024 is no exception. Hotly contested Senate battles and a divisive Presidential race landscape are some of the factors driving unprecedented political ad spend. Estimates show that this year’s political ad spending is expected to stand between $10.2 billion and $12 billion. This translates to a 13%-30% increase from the 2019-2020 election cycle ad spend.

This creates a pressing need for advertising and marketing leaders from outside the political landscape to find creative ways to navigate the politics-saturated market and chalk out ways to make the most of their spending in a period of localized inventory scarcity and high demand. Advancements in generative AI are also likely to create a landscape of misinformation and disinformation, especially on social media. This brings an additional responsibility to advertisers to safeguard their brands and clients from the potential pitfalls of such AI-generated misinformation and harmful political content.

According to a report by Insider Intelligence, TV media is again expected to take the largest chunk of America’s political ad spending. It is anticipated to rise 7.9%, accounting for 71.9% of all spending. In addition, advertising costs on TV and other mediums are also expected to rise with the presidential campaign reaching its full swing. These trends will likely affect all kinds of advertisers, as TV, radio, and out-of-home advertising is anticipated to be rife with election advertising. This would make getting non-political messages across considerably harder, as there is expected to be considerable noise in the market between August and November.

Our Methodology

To list the 10 Worst Advertising Stocks to Buy According to Short Sellers, we used a Finviz screener to filter out stocks catering to the advertising industry. Next, we narrowed our list of stocks by selecting the ones having high short interest. Finally, the stocks were ranked in ascending order of their short interest. We also mentioned the hedge fund sentiment for each stock.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

10 Worst Advertising Stocks To Buy According to Short Sellers Photo by Joshua Earle on Unsplash

Stagwell, Inc. (NASDAQ:STGW)

Short Interest: 5.38%

Number of Hedge Fund Holders: 9

Stagwell Inc. (NASDAQ:STGW) is a digital-first global marketing company specializing in performance media and data, digital transformation, creativity and communications, and consumer insights and strategy. The company’s Brand Performance Network segment encompasses creative media consulting, unified media and data management structure with omnichannel media placement, and business-to-business marketing capabilities. The Communications Network, in contrast, covers a network offering strategic corporate communications, advocacy, public relations, investor relations, online fundraising, and other services to political and advocacy organizations and corporations.

Stagwell (NASDAQ:STGW) also specializes in digital storytelling, multi-cultural marketing, cultural relevance, and influencer integration. The company’s financial results for the first half of 2024 have put it in a solid position to exceed or make guidance for the year, strengthening its position for H2. Its strong financials have dramatically altered Stagwell’s industry standing, with consultants and industry leaders beginning to see it in a different light. Over the past months, it has received many more opportunities in the $10 million+ range. To put this into perspective, the company had one such opportunity last year. This year, it had 11.

The net new business in Q2 2024 reached $113 million, a record for the company. The Creative win of Cadillac and Chevy from General Motors was the most significant in the company’s history. Apart from General Motors, the company also managed major wins with Macy’s, Target, Delta Airlines, and Zales in Q2 2024. These wins are expected to continue in Q3, including Ferrero and Anomaly, making an extra $50 million in wins.

Revenue in Q2 reached $671 million with a 6% growth. This growth was led by a 42% growth in Advocacy, 9% growth in Creativity and Communications, 5% in Performance Media and Data, and 13% in Stagwell Marketing Cloud. Digital Transformation also grew by 2%. However, with demand from technology companies increasing as more AI projects come in, the company is confident in achieving double-digit growth.

Apart from acquiring companies, the company is also making considerable investments in growth and internal development. It spent an additional $10 million on new business pitches, travel and entertainment, its Cannes experience, and other one-time compensation expenses. Overall, it is spending around $20 million on these growth initiatives in a quarter, which are paying off with the new larger wins and growth in the Stagwell Marketing Cloud. On average, Stagwell’s (NASDAQ:STGW) top 25 clients are now spending around $24 million per annum with the company.

Choice Equities Capital Management made the following comment about Stagwell Inc. (NASDAQ:STGW) in its second quarter 2023 investor letter:

“Stagwell Inc. (NASDAQ:STGW) – Stagwell is another company likely to benefit from a potential increase in advertising budget spending. The company can most succinctly be described as a digitally savvy marketing agency. CEO Mark Penn has built the company through acquisition, starting with the first major platform acquired, which was media agency MDC Partners in 2019. With roots tracing to Penn’s experience in running polling agencies, Penn has pieced the business together through acquisition, with a focus on adding entities with targeted digital capabilities to help their clients succeed in the digital transformations of their marketing functions. The company counts Apple, Google, Amazon and Microsoft amongst its customers. As a relatively new entity, the agency is devoid of many of the low-growth business elements its older legacy-oriented peers encounter with their exposures to decaying media verticals.

Shares look attractively priced, trading at a single-digit PE multiple and offering a mid-teens free cash flow yield. The company has a highly cash generative model, offers attractive topline organic growth that is likely moving into the mid-teens going forward on the back of digital tailwinds and a ramp in political spending. Additionally, recent share repurchases have cleaned up the cap table, shrunk the float and should make the story easier to understand for investors who still may be unfamiliar with the name.”

Overall, STGW ranks 8th among the worst advertising stocks to buy according to short sellers. While we acknowledge the potential of STGW as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STGW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.

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