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Lions Gate Entertainment Corp. (USA) (LGF): Why Passive Investing Could Be To Blame For Lagging Stock

Lions Gate Entertainment Corp. (USA) (NYSE:LGF) investors can probably point at least some of the blame for Lions Gate’s lackadaisical stock performance on it being left for dead by passive investors. That’s the theory that was put forth by Murray Stahl‘s Horizon Kinetics (parent company of hedge fund Horizon Asset Management) in its first-quarter market commentary.

Horizon Asset Management, which reported owning 2.71 million shares of Lions Gate Entertainment Corp. (USA) (NYSE:LGF) as of December 31, which represented a new position added during the fourth quarter, pointed out that shares of the stock are flat since late-2015 and have gained just 3% since late-2013, despite the company having greatly diversified and strengthened its operations following its acquisition of Starz late last year (which Horizon Asset Management was a big investor in).

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Horizon Kinetics’ market commentary pointed a finger squarely at passive investing to explain why Lion’s Gate is underperforming the market. As the firm pointed out, Lion’s Gate is not included in a single ETF, while companies with similar market caps like Ralph Lauren Corp (NYSE:RL) and H&R Block Inc. (NYSE:HRB) are included in 78 and 80 ETFs respectively. Horizon Kinetics believes such a disparity in the passive ownership of different stocks also leads to a disconnect in their valuations, as the indexed stocks enjoy heightened buying which artificially increases the stock’s price (while conversely, outflows from active funds has forced some selling of stocks, including stocks not included in indexes, pushing their prices down).

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This isn’t the first time Murray Stahl has spoken about the inefficiencies and dangers of passive investing. We reported on Horizon Kinetics’ fourth-quarter market commentary earlier this year, in which it was stated that passive investing could soon become a bubble, where there aren’t enough actively managed funds in the market to efficiently value stocks.

Lions Gate Entertainment Corp. (USA) (NYSE:LGF) appears to be one of the early victims of the meteoric rise of passive investing, having been left on the sidelines trading at a P/E multiple of about 13x according to Horizon’s calculations of the combined company’s (Lions Gate and Starz) three-year results as separate companies, while the S&P 500 trades at nearly double that, as well as at 20x forward earnings. It likely won’t be the last.

Murray Stahl
Murray Stahl
Horizon Asset Management

Disclosure: None

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