Alpha hunters might consider net long positions in industries trading at attractive prices, market neutral positions for fairly valued industries, and net short positions in industries with substantially unattractive valuations. If they are willing to hedge their positions, they can find more investment opportunities than just hoping to find the best stocks to buy today. Instead, they can use fully or partially hedged positions to bet on the mean reversion of different stocks in an industry while minimizing or reduce exposure to market volatility.
A prior article highlighted different industries based on their potential for generating alpha by stock picking. CATV System stocks appear promising for constructing net-long positions. Attractively-priced stocks and perplexingly precious stocks were identified in this industry.
Plots of companies within the CATV industry reveals that there are some stocks that are more attractively priced than others:
In each of these graphs a measure of quality or growth is plotted on the y-axis as a function of a measure of cheapness on the x-axis. Historical price-to-earnings multiples, price-to-book multiples, and price-to-sales multiples were used as measures of cheapness. Analyst estimates for earnings growth, historical return on equity, and historical sales growth were plotted as measures of growth or quality. More attractive stocks are found up and to the left while less attractive stocks are found down and to the right.
Two above-trend CATV stocks above the line are presented in bold and two below trend CATV socks are listed in red:
Time Warner Cable
TWC and DISCA were found to lie among stocks in the upper left of these plots (higher quality, undervalued stocks) while LBTYA and TIVO were found to lie at the lower right of these plots (lower quality, overvalued stocks). Based on this work, a net long position in the CATV industry is recommendable. It can be constructed by buying TWC and DISCA shares while hedging with a smaller short position on LBTYA and TIVO.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.