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Playing Home Entertainment Like a Hedge Fund

Cramer is trying to focus your investment strategy by showing you where investing ideas really come from. They come from a single idea about a company or a trend. It’s an obvious trend in the entertainment industry that the DVD selling business is on its deathbed, says Cramer, and on the other hand, people are staying home more because it’s a costly night out if you plan on seeing a movie in the theater.

This has created a great opportunity in home entertainment, Cramer says, but how do you play it? What are the other options? Pay-per-view cable, which carries the baggage in the form of a brutal war of attrition between Verizon and AT&T on one side and cable companies like Comcast and Cablevision on the other? Not so fast, Cramer thinks you should take this part of the market out of the running for your investment dollar.

Discounting the cable space, this leaves the home video rental space, and Cramer sees two ways to go: Netflix and Coinstar which runs Redbox.

Cramer sees both of these as good companies in a great growth industry, but using a trick out of his old hedge fund playbook, he suggests the strategy of a paired trade: buying the best stock in the business while at the same time betting against a second stock in the same industry. By betting against another company in the industry, Cramer says, you’re hedging out the risk that home entertainment will turn out to be a flop, and because you’re buying the best company in the industry, the two trades shouldn’t cancel each other out.

Cramer reminds that if you employ this strategy, you may not make as much profit, as you would if you bought both stocks, but if you believe that one will go up more than the other, than that same stock will also go down less than its competitor if the industry goes sour.

So, which is the buy and which is the sell, Netflix or Coinstar? Cramer likes both, but he thinks Coinstar is the buy, and Netflix a sell, because just in case your thesis is wrong you shouldn’t be invested in two companies in such a similar space. Cramer is not saying that Netflix on its own is deserving of a sell, but if you’re running a hedge fund you’d bet against the competitor to protect yourself against the consumer rolling over.

Cramer’s bottom line: Coinstar is the best home entertainment play out there, and if you want to hedge out major risk and the consumer’s frugal ways, you should sell Netflix at the same time you buy Coinstar.

Want to get Cramer’s full analysis on why Coinstar is a good opportunity to buy? Check out the video!

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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