Motley Fool: Comcast losing ground as entertainment leader

Investors adored Comcast’s (Nasdaq: CMCSA) recent quarterly report: Revenue grew by 7 percent. Operating profits climbed even higher. Share buybacks will be beefed up. The dividend is rising considerably. But look closer.

The country’s largest cable provider closed out the year with 22.8 million video subscribers. That may be a big number, but it’s 135,000 fewer than last quarter, and marks 757,000 net defections through 2010.

Comcast is making up for the shortcoming by selling more Internet access and broadband telephone services and upgrading accounts to pricier digital cable offerings. But it’s still losing couch potatoes.

Netflix may have only 20 million subscribers now, but if it tacks on another 3.1 million this quarter, as it did last quarter, it will become the country’s leading premium entertainment service.

Satellite television juggernaut DirecTV may also surpass Comcast soon, gaining ground that Comcast is yielding. It has more than 19 million subscribers, having added 493,000 over the past year.

There’s also satellite radio player Sirius XM, which closed out 2010 with 20.2 million subscribers and is targeting an audience of 21.6 million accounts by the end of this year.

Are you still excited by Comcast’s report? Today’s premium entertainment golden child could soon settle for silver. By the end of the year, it may not even be fit to be bronzed. (Netflix is a “Motley Fool Stock Advisor” selection.)

Ask the Fool

Q: What’s arbitrage? – E.M., Dalton, Ga.

A: It’s the practice of profiting from short-term differences in price. Imagine that in the United States, you can buy stock in Meteorite Insurance (ticker: HEDSUP) for $30 per share. Meanwhile, you see that it’s currently selling for $30.50 per share in England. If you simultaneously buy shares in America and sell the same number of shares in England, you’ve earned a profit of 50 cents per share (not counting commission costs).

This may not seem like much, but those who engage in arbitrage are usually large institutional investors with millions to invest in big positions.

Q: Can you explain “FFO” in relation to REITs? – M.R., Adrian, Mich.

A: A REIT (Real Estate Investment Trust) may look and act like an ordinary stock, but it’s really a rather different kind of company. REITs typically own many properties, such as offices, hotels, shopping centers or apartments.

With most companies, net income is a useful number to evaluate, reflecting the profits left over from sales after all expenses have been subtracted. With REITs, though, net income isn’t as meaningful.

According to accounting rules, the value of REIT properties is decreased over time, with depreciation charged against net income, reducing it. In reality, however, real estate properties are probably not falling in value and may even be appreciating. So a REIT’s net income tends to understate its health. This is why, with REITs, you should look at the “funds from operation,” or FFO, instead. It ignores the effect of depreciation and other non-cash charges and gives you a truer picture of the REIT’s true performance.

Learn more about REITs at www.reit.com.

My dumbest investment

I made my dumbest investment in the 1960s, in a company supposedly specializing in the detoxification of soil and oil recovery. I bought based on what I knew about the need for such products rather than analyzing the company itself, which turned out to have been very shaky. There was no use trying to sell it because it would cost more than it was worth. – A.E., Chadds Ford, Pa.

The Fool responds: It was a lot harder to research a company back in the 1960s. Today, the Internet offers many easy resources, and online brokerages make lots of Wall Street research available as well.

It’s a common mistake to get excited by a company’s story and ignore its fundamentals. It may be offering an irresistible product or service, but if it’s saddled with unmanageable debt, or isn’t turning a profit, or is mired in costly legal battles or has more powerful competitors, then it’s not such a slam-dunk investment.

Even when such an investment is close to worthless, it may be worth selling, to offset your taxable income with the capital loss.