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I just completed a swap of all Northlake client positions in Charter Communications (CHTR) into Walt Disney (DIS).

CHTR shares have been strong the last few days on takeover rumors. The stock had fallen sharply last week after Time Warner Cable (TWC) announced poor earnings and guidance. GHTR takeover rumors appeared before the Liberty Global (LBTYA)/(LBTYK) buyout of Virgin Media (VMED) but surely a big deal in cable, even if it was in Europe, helped the takeover rumor gain traction. The only article I found regarding the rumor was on deadline.com which referenced a freeze in expenses at CHTR in conjunction with a move of the company's headquarters to Connecticut, close to the new CEO, Tom Rutledge. I like Rutledge and think he has the chops to create a lot of value at CHTR. However, I think it is way too soon for him to consider selling the company. I know that is not totally in his control but it just seems an odd thing for the Board to consider after bringing him in and launching an aggressive growth strategy with higher investment in marketing to attack CHTR's underpenetrated markets in digital video and broadband.

Those expense increases is what worry me especially after TWC soured investor sentiment toward the group. CHTR's increased spending is to gain new subs. If it works, the payoff long-term is significant. TWC appears to be catching up the industry on programming expenses after a year where its increase in this category sharply trailed other cable companies. If CHTR is not bought out, I fear that guidance for 2013 could disappoint the street and send the shares down to the low $70s.

Cable stocks, including CHTR, did exceptionally well in 2012 as fears about over the top and cord cutting receded, investors ignored the margin pressure from rising programming expenses, and appreciation of cable's dominant position (and hedge) in broadband grew. In addition, cable's entry into in business services became a material driver of growth. The TWC guidance, the re-emergence of Netflix (NFLX), the rollout of Aereo, and more focus on programming expenses could leave the group vulnerable. CHTR might be especially vulnerable given it is in investment mode.

DIS is a new buy. The company is at the beginning of a ramp in growth driven by ESPN and theme parks. ESPN, the company's biggest single asset, is coming off a period of heavy sports rights inflation. Increased rights fees are being passed through to cable and satellite distributors via increased affiliate fees, alread negotiated with 7 of the top 10 cable and satellite companies. The benefit of the fees begins this quarter. Over the next few years, the rights fee increases will level off as the affiliate fees rise, setting up margin expansion. A new national sports networks competitor form News Corporation (NWSA) is a risk to sentiment but will not impact ESPN's ramping profitability for several years if ever.

In theme parks, DIS is coming off a period of heavy capital investment. Visitation and per capita spending should benefit from the investment leading to growth in revenues and margin expansion at the parks. California is already seeing this benefit. Spending will pick up in Shanghai but I believe investors will cut DIS slack given the opportunity in China at the new park and to build DIS's already strong brand in the country.

DIS also appears to be at a good spot at its film and TV studio. Film seems poised for a good run with its upcoming slate driven by the Marvel acquisition and then the Lucasfilm acquisition. TV production is in a bull market for all the major players as increased spending by cable and broadcast networks all over the world are driving business fundamentals. The value of TV in a digital world to both traditional and new broadband distributors is bullish for DIS.

Disney and Liberty Global are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov. Disney, News Corporation, Liberty Global, and Virgin Media are net long positions in the Entermedia Funds. Steve is sole portfolio manager of Entermedia, owns a controlling stake in Entermedia's investment management company, and has personal monies invested in the Funds. The Entermedia Funds are long long/short equity hedge funds focused on media, entertainment, communications, leisure, and related technologies.

Source: Selling Charter And Buying Disney