In addition, there has been a fairly lackluster M&A environment, aside from some announced, high profile mergers including Entercom and CBS Radio and Sinclair and Tribune Media. We believe that there is a heightened M&A environment emerging and will build in the second half 2017. In our view, the prospect of the FCC lifting in-market rules, which will allow a TV broadcaster to own two of the big four Networks, and a lift in the ownership caps, both will be a catalyst for heightened M&A activity. Furthermore, in radio, there will be activity related to the stations that Entercom plans to sell to complete the CBS Radio merger. We believe that this emerging M&A environment will create winners and losers and, as such, it will become a stock pickers market.

OUTLOOK - TRADITIONAL MEDIA

TELEVISION BROADCASTING
After a strong first quarter performance, the TV stocks are down 2% so far this year, woefully underperforming the general market's 8% advance. Investors appear to be hyper sensitive about the state of the auto industry, especially in light of rising interest rates. Reports that car sales are slowing and inventories building does not necessarily imply that auto advertising will fall off of a cliff. One theory is that manufacturers and used car dealers, which have inventory to move, may need to advertise more, possibly with incentives. For investors to focus on just auto advertising to build an investment premise for the TV industry would be problematic, in our view. Auto advertising would have to decline by roughly 11% to 15% before it would offset the expected growth in retransmission revenue. While we are long in the tooth in this economic recovery, we do not anticipate auto advertising falling to that degree. To the contrary, we believe that auto advertising is relatively stable to only slightly down from year earlier levels. As such, the key revenue growth drivers for the TV industry, retransmission revenue and political advertising, appear likely to assuage some of the concerns over the economic cycle. In addition, we anticipate that M&A activity will emerge in the second half to help drive TV valuations. We believe that there will be a stronger second half performance for the TV stocks and remain constructive on the group, with one of our favorites being Entravision.

RADIO BROADCASTING
Radio stocks have been among the poor performers in the media group, down 6% year to date. We believe that the radio stocks have drifted following the announced Entercom and CBS Radio merger and the failed refinancing plan at Cumulus Media. Entercom put 14 stations up for sale in order to gain approval for the merger. While Entercom's balance sheet will not be highly levered as a result of the merger, many in the industry are still struggling with relatively high debt loads. This makes a heightened M&A environment for the industry seem unlikely. We believe that some of the likely buyers of radio may seek equity financing. In addition, we would note that Lew Dickey, the co-founder and past CEO of Cumulus Media, recently raised $207 million to fund acquisitions of media firms. We believe that a heightened M&A environment for radio is emerging and that investors should not write off the industry. A debt refi at Cumulus and iHeart Media would go a long way to help change the mood of investors toward radio stocks. We believe that the Entercom shares are oversold, but we encourage investors to also look at Salem Media and Townsquare.

PUBLISHING
While the Publishing stocks as a group are up 12% year to date, the performance is skewed by two companies in the index that performed well, namely New York Times and News Corp, which were up 20% and 33% respectively. The rest of the stocks in the group drifted. We believe that investors soured on the industry given the secular issues facing the retail industry, including bankruptcies, store closings and lackluster sales. Retail as an advertising category for publishers has recently accelerated in the rate of decline to near 20% from the trendline decline of 8% to 12% over the past several years. Despite the upheaval in the retail category, managements appear to be managing cash flows well. Certainly, the focus on the business has put the nascent industry consolidation wave on hold. We believe that the dynamics that started the heightened M&A activity in the industry are still prevalent. There is a need to aggregate digital audiences for advertisers and to drive economies from regionalization of publication and distribution of papers. As such, we believe that there are investment opportunities in the group. Notably, managements appear to be stepping up marketing efforts to investors too. Look for a number of publishing teams on the road this summer on non-deal road shows.

OUTLOOK - INTERNET AND DIGITAL MEDIA

The FAANG stocks (sometimes Microsoft is substituted for Netflix, since it is bigger) represent an increasing percent of the market cap of the S&P. They also represent an increasingly larger percent of the index's performance. Goldman Sachs, which substitutes Microsoft for Netflix, suggested in early June that they represented 40% of the S&P 500's move. As a consequence, institutional investors often feel compelled to own these stocks if they have any hope of outperforming the index.

During the week of June 5th – June 9th, 2017, each of the FAANG stocks traded at their highest stock prices ever. This has led to concerns about a bubble forming in the tech sector. However, while expensive on an LTM EBITDA basis, these stocks look quite reasonable on forward estimates. For example, Facebook trades at 24.7x LTM EBITDA but only 13.3x 2018E EBITDA. Alphabet/Google trades at 17.6x LTM EBITDA but only 10.7x 2018E EBITDA. As long as these bellwether tech companies continue to meet or exceed estimates, we think it is more likely that investors will experience continued gains as they did in the second half of 1995 and 1996.

Did the strong 1H 2017 stock price performance of the bellwether tech names trickle down to the 4 segments we follow (digital media, social media, ad tech & marketing tech)? In fact, it did. As shown on the charts on the following pages, the digital media, social media, ad tech and marketing tech sectors posted stock price increases of 19%, 27%, 28%, and 26%, respectively.

Driving the performance of the digital media stocks was Interactive Corp (IAC), which was up 59% driven by strong operating results and a proposed combination of its HomeAdvisor subsidiary with Angie's List that will create a new publicly traded company. Social media stocks were up 27% driven by the performance of Facebook, whose stock was up 31%. Snap priced its IPO on March 2nd at $17 per share and traded as high as $29.44 (+73%) intraday, but finished mid-year at $17.77, up just 4.5% from its IPO.

Ad tech stocks significantly outperformed the S&P 500, with the sector up 28% in the first half of the year. The biggest contributor to this performance was The Trade Desk (TTD), which was up 80% in the first half. The Trade Desk significantly outperformed expectations in 1Q, and raised its full year revenue and EBITDA guidance by 10%. Other notable stock price gains in the sector came from Rocket Fuel (FUEL)
+61%, Yume (YUME) +31%, Maxpoint (MXPT) +24%, and Criteo (CRTO) +19%.

Marketing technology stocks also performed particularly well, with the group up 26% in the first half of 2017. Hubspot (HUBS) was the strongest performing stock in the group (+40%), followed by Adobe (ADBE) +37%; and Salesforce (CRM) +26%. While the ad tech stocks performed well, mostly across the board (7 of 10 stocks were up while one was flat), the marketing tech stocks were more of a mixed bag. Large cap marketing stocks such as the aforementioned Hubspot, Adobe and Salesforce performed well, while smaller cap marketing stocks such as Brightcove (-23%) and Marin Software (MRIN) (-45%), underperformed the markets.

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