Changing channels: Expert just dumped this ASX 200 share to buy its competitor

Two very similar companies in the same industry have been switched around in Wilsons' focus portfolio. Why?

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Something about human psychology induces most people to invest in just one stock in a particular industry.

There is nothing stopping us from investing in runner A, runner B, and runner C in a race, but most ASX investors will back one and stick with it.

The phenomenon isn't just limited to amateur investors. Professionals do it too.

Wilsons associate analyst Rob Crookston, for example, explained why his team recently sold out of one media ASX share to pick up its rival:

Two almost identical companies

Wilsons' focus portfolio this week announced that it is exiting its position in News Corporation (ASX: NWS) in order to buy into Nine Entertainment Co Holdings Ltd (ASX: NEC).

"Both News Corporation and Nine Entertainment are media stocks, and we think this is a like-for-like switch in terms of portfolio characteristics, but we have a preference for NEC at its current price and current fundamentals," Crookston said in a memo to clients.

News is best known for its tabloid newspapers and Foxtel pay television service, while Nine is famous for its broadsheet newspapers and free-to-air television network.

But that's not where the similarities end. News has significant ownership of ASX-listed online real estate classifieds provider REA Group Limited (ASX: REA) while Nine has a big stake in REA's rival Domain Holdings Australia Ltd (ASX: DHG).

The Wilsons team cited seven reasons why it changed channels:

  • Nine's fundamental metrics appear more favourable relative to News
  • Nine has a higher quality earnings base (excluding real estate)
  • Nine is less cyclical and more resilient than the market is implying
  • Domain looks to be at a better valuation point than REA Group
  • Nine has a proven history of organic growth
  • Nine has higher expected returns to shareholders
  • Nine has valuation appeal

Crookston admitted Nine's earnings could be lower than News, but it was a positive trade-off.

"We think the risk is to the upside while Nine transitions to digital and subscription-based revenue," he said. 

"NEC adds a quality cyclical to the focus portfolio, at a lower multiple and a higher dividend yield than the portfolio."

News Corp shares are down 21.8% year to date while Nine is down about 30%. Nine pays out a juicy dividend yield of 6.8%, compared to News' 1%.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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