Is DirecTV the dish your portfolio needs?

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Kevin Kersten 09/01/2014

It can be one thing to invest when you are small and you just need to pick stocks that are going to go up or go down. You know you will be able to easily buy or sell as much stock as you can afford easily without worrying about getting a good price or needing to worry about news of your investments getting out and distorting the market.

Things change when you start taking on bigger positions, particularly when you are managing something as big as a hedge fund. Suddenly, you need to accumulate a lot more stock in order make your trades successful. You need to control a lot of shares to make money and you want to be able to buy them a a good price. If word gets out you are buying, shares could go up before you get a significant position in the stock, defeating the very purpose of buying the shares in the first place.

But when you are big and put on a significant position, you can do a lot more than just hold some shares and hope the price goes up. You can call up a company and talk to important people or even vote yourself onto the board of directors. You can make changes to corporate policy and cause companies to consider various strategic alternatives. Your actions can actually add significant value to the company. Activist shareholders have been a little more common recently, and overall they are a healthy influence on the market.

When your name is John Paulson you also gather a little attention. Paulson is worth about $14 billion after running a hedge fund for years on Wall Street. He became famous with big bets against sub-prime mortgages before the housing bubble burst. He personally made about $4 billion in 2007 alone!  Not bad when you consider he started his fund in 1994 with $2 million dollars. Paulson obviously knows about trading, but he actually specializes in event driven investments like mergers and acquisitions.

So when Paulson recently purchased 10 million shares of Direct TV ( DTV ) he is back to playing his old game of buying stocks and hoping for a big event. Paulson owns about about 2% of the total shares, but it is enough to give Paulson a voice and he probably has a pretty good idea of what is going to happen.

There has been a lot happening in the telecommunications space. Paulson was a proponent of a Sprint ( S ) and Dish Network ( DISH ) merger last year, but that did not happen. With modern technology you can get media streamed to you in many ways. Companies like AT&T ( T ) already bundle television, home phone, and cell phone plans. Getting and retaining customers has been key in these highly competitive areas. What exactly is going to happen in the space is hard to say right now. Various companies are all pursuing each other and there is no telling what the internet, phone and media world will look like in five years.

Direct TV is trading at $84.55 a share and the stock has been on an uptrend, rising from the 30's five years ago. Last year the company had $31 billion in revenue and $5.17 per share in earnings. This year, expectations are for revenues to rise to $32.5 billion and earnings to come in near $5.81 a share.

Also, AT&T is also trying to buy the company, which should keep some support under the stock.


Chart courtesy of stockcharts.com

The January 85 calls have wide bid/ask spread of 3.65 to 4.30. You should be able to shave something off of that spread, giving you a covered call entry price of about $80.65 (84.55-3.90=80.65)t. That gives the trade a 5.3% return over the next 142 days. Annualized (for comparison purposes only) that is a 13.8% return with 4.6% downside protection.




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

Originally published on InvestorsObserver.com



This article appears in: Investing , Options

Referenced Stocks: DTV , S , DISH , T

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