Get ready for 2014 with an entertainment trade

By Kevin Kersten,

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Kevin Kersten 12/23/2013

With the holiday season already here, 2013 is coming to a close and it has been an interesting year. This year started out with some hard mandatory cuts to government spending. The Euro debt crisis which took up all the media attention from last year has become old news. Unemployment is still high in Europe, so it would not be proper to say the problems are fixed, but they are out of the news. Domestically, a compromise budget deal went through Congress, setting the stage for the next two years.

Edward Snowden made the news this year as he told the whole world that our government is watching over every email and phone call in order to keep us safe.  But on the other hand, they can't get the Obamacare website up and running. President Obama disclosed that might not get to keep your current health plan, and signups have been off to a very slow start. When will we learn trusting politicians is risky business?

Unemployment has been coming down towards 7.3%, but many people have chosen to leave the workforce. The stock market has done really well so far this year and for all the worry we had last year at this time it has turned in a stellar performance. The S&P 500 recently closed above 1800, a big 26% move up from the 1426 level where it started the year. The Dow Jones Industrial Average closed at 16,167, up 23.3% from where it started the year.

Late last year, on December 17, 2012, my pick for trade of the year was a position on CBS ( CBS ) and it did quite well.

At the time we said:

"CBS ( CBS ) is a diversified media company competing with the likes of Disney ( DIS ), News Corp ( NWS ) and Time Warner ( TWX ) that have been doing well recently. The stock has a Five STARS S&P rating. Revenues for 2012 should grow 6% while revenues for 2013 are expected to grow 7.5% to $16.2 billion.  While the CBS brand television network is the most visible of the company holdings, it also owns CNET, Simon and Schuster publishing, Showtime Networks, 130 radio stations, local TV stations and more…

The stock is trading near 35 and has been in a steady upward trend from the 20-range two years ago. The company has spent 1.7 billion in the last two years buying back stock, a program it recently replenished to continue… Take a look at a covered call on CBS. An investor can buy the stock and sell the January 2014 35 call for a 31.05 net debit, which will give us about a 13% simple return. The trade has about 13% of downside protection with an annualized return rate near 12%. The stock pays a dividend yield of 1.3%."

Like the rest of the market, CBS has done well this year. In fact, it has almost done too well. The stock is at $59.79 so it looks like a very safe bet it is going to stay above the 35 level. When we put on this trade we were not expecting such a huge rally in the stock market. That is a 70% rise over the last year! When we pick trades we always look for the best stock for the trade and at times we can pick ones that are so good they go up way more than expected. Nonetheless, if you did this covered call trade you will pick up a 13.3% annualized return rate between the covered call premium and the dividend.

As we look forward to the coming year, we could be in for volatility. A lot of companies have been buying back shares and while earnings have been growing there are concerns that buybacks might be masking a lack of real growth. People are still very concerned about the Obamacare rollout, and the Federal Reserve -- which got a new chairman -- will now start slowing the quantitative easing that has helped fuel the stock market rally. The Federal Reserve has printed a lot of money trying to keep interest rates down which has helped the stock market but could cause problems in the future.

Over the last year people have actually turned off the news. Without an election and a steady stream of crises, the news networks have seen a drop in viewership. People are turning on other channels and getting on with life. The economy has been bad for a while, but it seems as if many people are completely over talking about it. They just want to go on with their lives. It could be the natural reaction of a long period of economic hardship or it could just be my perception.

Whether you flip on the TV, go out to an amusement park or chances are when you want to take the grandkids and get away from things you will still be affected by Disney ( DIS ). Disney is one of the largest media around companies owning ABC, the Disney Channel, and ESPN. The company also owns the "happiest place on earth" and gets royalties from branded items. Analysts expect sales to rise 6.7% in 2014 and 5.8% into 2015. Earnings per share have been growing the last several years, 2011 saw $2.52 a share, 2012 produced $3.13 and 2013 made $3.38 a share.

Chart courtesy of

With Disney at 72.20 the January 2015 77.50 covered call has a trade that caught our attention. If you buy the stock you can sell the June 77.50 call for 4.35 at the same time for a net debit of 67.85. This trade has 6.0% of downside protection, a 14.2% simple assigned return rate and a 13% annualized return rate (for comparison purposes only). With the stock market performance of the past year it could be tempting to hold positions long, but with the stock market near highs it would not be surprising to see them take a breather or enter a correction at some point. DIS should be a good play for sports, entertainment, fun and investing.  

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on

This article appears in: Investing Options
Referenced Stocks: CBS , DIS , NWS , TWX

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