Discovery Communicatns New (NASDAQ:DISCA)

CAPS Rating: 3 out of 5


Player Avatar AAOI (99.54) Submitted: 7/18/2010 1:22:01 PM : Underperform Start Price: $18.11 DISCA Score: +7.05

Gotta love a market neutral pair trade in today's uncertain environment. Especially one with a tantalizingly attractive 15% spread, where I know the recent widening was driven by a significant amount of forced selling brought about by the recent Russell rebalancing - and therefore will almost certainly be a temporary issue that should not only correct itself naturally, but better yet, do so in relatively short order. Add to this already attractive mix an outstanding capital allocator with a long paper trail of success that made his name by exploiting exactly these type's of "no brainers" (did I mention the free borrow on the short side of the trade) and imho you have all the makings of a tremendous low-risk, high-return investment opportunity that will likely do incredibly well going forward regardless of the general market environment. .

Notably, the "no brainer" reference above wasn't just some off the cuff quip, but the actual response of John Malone after he was recently asked about his thoughts on the initiation of a buyback at some point over the next quarter or two in order to close the relative valuation gap between Discovery's two share classes. Candor is a beautiful thing, no? Anyhow, given the spread will almost certainly revert back towards its historical mean at some point over the next few months (buyback or no buyback), investors who get in at or around the current prices will likely generate an incredibly attractive 15%+ IRR with essentially no risk - a pretty attractive combination in my opinion.

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