September 3, 2013 - Profit from cord-cutters
With cable prices constantly increasing, it comes as no surprise that some consumers are cutting the cord with cable and satellite companies.
The rising costs of cable and satellite subscriptions are not the only reason why people are cancelling their cable plans. The internet has ushered in a wide range of sites and services. Netflix (NFLX), Amazon Prime (AMZN) and Hulu have made it easier than ever for people to get their video demands outside of cable and satellite providers. As recently as a few years ago, it was unimaginable that we would see a mass exodus from these services, but the data is proving otherwise.
Over the four years, the U.S. economy has been recovering, albeit slowly, from the recent recession, so it would be reasonable to assume that more households would be able to afford paid television packages. In fact, just the opposite is occurring, and the number of households that currently pay for television is the lowest that it has been in the last four years.
Some people are cutting the cord to save money. Others are doing so because they prefer to stream their content to the computer or through their streaming devices such as Apple's (AAPL) Apple TV or Roku.
Regardless of the reason, cable and satellite providers are losing customers. The next logical question becomes how can we as investors take advantage of the shift in how people satisfy their television needs.
While cable and satellite companies have been losing customers, people do still want their entertainment needs fulfilled. People that cut back on cable packages will find other places to spend that money, so a good way to profit from the current trend is to look at a wide range of entertainment stocks.
A good option to consider is the exchange-traded fund Consumer Discret Select Sector SPDR (XLY). This ETF contains all the entertainment companies. Its top holdings include Disney (DIS), Amazon (AMZN) and Twenty-First Century Fox (FOXA), which are all content creators or providers within the new model. In addition, you also get exposure to traditional cable companies Comcast (CMCSA) and Time Warner Cable (TWC).
Keeping your money spread out over so many different entertainment companies allows you to profit if the current trend continues to non-pay television, but also keeps you involved in cable companies in case the trend reverses.
A nice hedged trade on XLY would be the December 49/52 bull put credit spread. In this trade, you would sell the December 52 put while buying the same number of December 49 puts for a credit of 30 cents. This trade has a target return of 11.1%, which is 35.9% on an annualized basis (for comparison purposes only). With XLY currently trading at $57.73, this trade has 9.4% downside protection.
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