NEW YORK (CNNfn) - Investors used to figure they couldn't go wrong owning stock in media giant Walt Disney Co., with its lavish empire of theme parks, cruise ships and movie studios.
After all, you're never far from a reminder of Disney's might. You flip on Disney-owned ESPN, watch the hit Disney movie "Good Will Hunting," or read Disney-published "Winnie the Pooh" to your kids. Those mouse ears are everywhere.
But owning big media stocks isn't so simple anymore. It's not so much that investors shouldn't own media stocks -- it's that they need to buy the right ones.
"You really have to know what you're doing to buy stock in these companies," said Porter Bibb, managing director and media specialist at Ladenburg Thalmann in New York. "You have to take it company by company. It's very, very tricky."
For example, if you bought shares of Disney (DIS) in the spring when it was soaring on strong second-quarter profits and news of a 3-for-1 stock split, you probably thought you'd make money.
But between April and October, Disney stock has dropped almost 29 percent. Fourth quarter earnings skidded 24 percent, hurt by weakness in movie distribution and international home videos.
Disney's ABC network has been embroiled in a bitter dispute with one of its unions amid cutbacks and layoffs to counter skyrocketing programming costs. Locked-out union members disrupted election-day coverage.
"The more cyclical stocks, like entertainment, have been hit hard," said Matt Harrigan, a media analyst and vice president at JP Morgan. Plus, Disney was hurt by its Asia exposure.
Networks live a soap opera
One source of pain for big media stocks is that television networks are getting pummeled because they have to spend millions on programming.
ABC, NBC and CBS bid billions for rights to televise professional sporting events like National Football League games. NBC pays $13 million an episode for "ER," and gives Oscar winner Helen Hunt of "Mad About You" $1 million a show. Plus, critics largely panned the fall lineups at all three networks.
"The costs of programming are the biggest trend that's affecting the financials," said Leslie Murdock, media analyst at Ernst & Young.
NBC recently announced staff cuts and a management shakeup amid rumors that parent General Electric (GE) is looking to sell the ailing network. NBC recently reshuffled top management amid a steep ratings dive.
But CBS Corp. (CBS) is outpacing the industry because of double-digit radio revenue and its lucrative football programming, said Jessica Reif Cohen, media analyst at Merrill Lynch. The company broke even in the third quarter because of losses with its network.
"Their numbers should be terrific," Cohen said. "They are going against the trend and gaining market share."
Searching for the right mix
Another conglomerate, Seagram Co. Ltd. (VO), hasn't had much luck convincing investors it has the right strategies in acquiring new businesses.
"The problem is they're going through a fairly major transition still," said Dennis McAlpine, media and entertainment analyst at Josephthal & Co. "You get mixed signals."
Seagram CEO Edgar Bronfman Jr. has taken heat for his 1995 decision to sell the company's 25 percent stake in Dow blue chip DuPont in order to finance his push into the volatile world of Hollywood.
Bronfman used the $8.8 billion DuPont (DD) sale to buy an 80 percent stake in Universal, which was then called MCA. Critics said he didn't have a clear strategy for the acquisition.
He sold Universal's television assets to HSN Networks for $4 billion last October, and now Seagram is talking about a new television venture with Brillstein-Grey, which some analysts consider an about-face.
Most recently, Seagram thought it could get as much as $1 billion for a film library to pay for more acquisitions, but the bids came in around a paltry $400 million.
"They haven't been able to manage the acquisitions well," McAlpine said.
Some good news
But other media giants seem to have found the right formula.
Viacom Inc. (VIA.B) and Time Warner Inc. (TWX) (owner of CNNfn) have watched their stocks jump 50 percent this year amid strong earnings and a promising business outlook.
Likewise, Rupert Murdoch's News Corp. (NWS) is soaring amid plans to spin off its Fox Entertainment unit.
"These companies have all managed to do the right thing," said Richard Read, a media analyst at Credit Suisse First Boston in New York. "The market loves these stocks."
Viacom Inc.'s home-video business, Blockbuster Video, helped drag it out of a slump. Viacom, which also owns MTV, blew past Wall Street estimates with third-quarter earnings on the strength of double-digit growth.
"Viacom is a turnaround story," Harrigan said. "Blockbuster has had an unbelievably hot hand."
Time Warner's cash flow doubled in the third quarter thanks to higher advertising rates in its publications. Revenues also jumped from production of shows like "ER" by its Warner Brothers division, and the syndication of the show "Friends."
Viacom, Time Warner and News Corp. have all been able to profit by having interests in both the production and distribution side of the entertainment business. For example, Time Warner's Cartoon Network can develop children's programming for use on its Warner Bros. Network, Read said.
"What you pay for in one business can help you make money in another business," Read said. "They clearly do have their hands in everything."
-- by staff writer Martine Costello