The Entertainment Industry Is Hot

One of the things I like to look for when doing research investment is general macro trends in the economy. A few weeks ago I highlighted the world's growing population, more complex energy extraction, and low interest rates as trends investors can profit from. Another trend that has come as something of a surprise to me recently is our growing appetite and willingness to pay for entertainment.

With the economy yet to fully recover from the recession of a few years ago, it's surprising at first that people would be spending more money on movies, amusement parks, gaming devices, and other entertainment activities. But on further inspection it makes a lot of sense.

First off, the recovery has been sort of binary in nature. Those with higher levels of education have lower unemployment and higher pay while those with less education have higher unemployment and lower pay. In other words, those who have incomes high enough to allow for significant disposable income are doing quite well in the current economy.

The other trend to look at is what we're spending on basic necessities like food and housing. Fellow Fool Morgan Housel recently pointed out that we spent 30% of household income on food in 1950 and we only spend 13% on food today. Spending on housing has grown slightly from 27% to 33% over a similar time frame, but the two added together are down considerably, leaving more money for entertainment.

Put these two trends together and you have a portion of the population that has more disposable income, and they're looking to be entertained.

The companies taking advantage
Disney (NYS: DIS) is consistently breaking through new 52-week highs as it takes advantage of the entertainment spending trend. Disney has picked up its growth recently with revenue growth of 7.4% over the past year versus 3% for the past five years. Earnings-per-share growth is up a much more impressive 21.3%.

Some of Disney's success has been because of smash hits on oversized IMAX (NYS: IMAX) screens around the world. We may have gone through a recession in 2008-2009, but the box office had a record year when the rest of the economy was in the dumps. One of the reasons is that a night out at the movies is still a relatively cheap form of entertainment, even with the extra cost of an IMAX ticket. This year, with over a quarter of the year left, the domestic box office has already topped 78% of last year's total. It looks like it's shaping up to be another record year.

For those who prefer more home-based entertainment, Activision Blizzard (NAS: ATVI) has captured a significant amount of entertainment dollars in the recent year. The company has grown revenue at a rate of 14.7% over the past five years and the stock has tripled over the past decade. Activision and other game developers face a changing landscape with consumers moving away from consoles to smartphones and tablets, but this creates an opportunity as well. Activision has a growing number of games on Apple's (NAS: AAPL) app store, and big game developers are quickly learning how to monetize these new devices.

Finally, a winner in the entertainment industry that may shock you is Cedar Fair (NYS: FUN) , the amusement park operator. The company has shot out of the recession with growing revenue and increased profitability, and shows no signs of stopping. The ticket to get in may be expensive, and so is the food and drink, but people with the cash to ride the rides are spending more than they were a year ago, a strong trend for this entertainment company.

These companies have performed well, and their stocks have crushed the S&P 500 over the past 10 years.

DIS Total Return Price Chart
DIS Total Return Price Chart

DIS Total Return Price data by YCharts

I could even throw Apple into this group, highlighting the strength in the top end of the market. Who stood in line on Friday to buy an iPhone just to make calls? It's an entertainment and productivity device more than a phone, and Apple's success coincides with the strength in entertainment stocks.

Foolish bottom line
The entertainment industry may not seem like a place to find great stocks with the economy in the weak position it's in, but a closer look shows a lot of strength. As we recover in coming years, I expect the trend to continue and those with the money to seek out entertainment to continue to do so.

Delivering top-notch entertainment is just one of Apple's many strengths in its industry. If you'd like to learn more about how to play the tech powerhouse, pick up a copy of our premium research report on Apple. You'll learn everything you need to know about the stock, including how the recent iPhone 5 launch will affect it, and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.

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Fool contributorTravis Hoiumowns shares of IMAX and manages an account that owns shares of Apple. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool owns shares of Walt Disney, Apple, and IMAX.Motley Fool newsletter serviceshave recommended buying shares of Activision Blizzard, Apple, IMAX, and Walt Disney.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Activision Blizzard.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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