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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:

(click to enlarge)Earnings Growth vs. PE

(click to enlarge)ROE vs. PB

(click to enlarge)Sales Growth vs. PS

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:

Ticker

Company

Country

P/E

P/S

P/B

Growth Est

Sales Growth

ROE

AMCX

AMC Networks

USA

18.1

2.2

16.6%

12.9%

CHTR

Charter Communications

USA

1.1

31.7

5.0%

5.5%

-50.3%

CMCSA

Comcast

USA

19.5

1.5

1.9

15.3%

17.5%

10.1%

CVC

Cablevision Systems

USA

18.5

0.6

13.7%

2.8%

DISCA

Discovery Communications

USA

19.3

3.1

3.1

18.3%

121.2%

16.8%

DTV

DIRECTV

USA

13.5

1.2

14.7%

13.0%

LBTYA

Liberty Global

USA

1.5

4.8

0.0%

8.0%

-29.8%

NETC

Net Servi

Brazil

33.3

1.2

2.1

10.8%

27.9%

6.9%

SJR

Shaw Communications

Canada

12.1

1.8

2.4

3.7%

14.0%

22.0%

TIVO

TiVo

USA

4.6

4.0

40.0%

-1.7%

-18.9%

TWC

Time Warner Cable

USA

16.6

1.4

3.8

14.9%

10.8%

22.6%

VIAB

Viacom

USA

12.2

1.8

3.5

15.1%

0.0%

27.4%

VMED

Virgin Media

USA

93.5

1.1

9.6

0.0%

2.1%

5.7%

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.

Source: 2 Cable TV Stocks To Buy, 2 To Short