Time Warner Inc (TWX), Netflix, Inc. (NFLX): Invest in Inelasticity

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Back in reality, Netflix, Inc. (NASDAQ:NFLX) exists and excels largely because of the monopolistic pricing of cable companies. Consumers who are already paying high prices for monthly Internet and cable services choose to leverage their fixed costs by paying a low price of $7.99 to stream videos from Netflix, Inc. (NASDAQ:NFLX). It is one of the few freedoms that consumers have in the world of cable and broadband. This makes Netflix a great business model and a potential growth vehicle for your portfolio.

Backed into a corner
Health care has the most inelastic pricing of any major industry. Unlike our cheeseburger example, there are only a handful of choices for most health care decisions. From major surgery to generic drugs, patients unfortunately have little ability to shop around for low prices.

Severe morning sickness can be a debilitating condition — just ask my wife. Expecting our third child, she has been in a significant amount of pain but cannot take many of the normal pain-relief remedies due to pregnancy. Thankfully, our family doctor prescribed a generic form of Zofran for her condition: Ondansetron, manufactured by Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA).

Patients like my wife are at the mercy of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s pricing department, paying $1,400 for a bottle of 30 Ondansetron. While this is terrible for sick patients, shareholders are smiling wide. Teva is the country’s largest generic-drug manufacturer, selling generic forms of products from Augmentin to Zovirax. Teva’s sales of $20 billion and EBITDA of $5.6 billion are strong and consistent, and the company also pays a 3% dividend.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is a defensive stock that tends to outperform when markets are doing poorly. This is  a consideration to make when modeling your portfolio, as too much allocation to defensive investments can lead to underperformance.

Cable bills and prescription drugs are nearly as unavoidable as death and taxes. Given stable earnings and growth through price increases, wise investors will follow the inelastic demand curve to a well-rounded portfolio.

The article Invest in Inelasticity originally appeared on Fool.com and is written by Spencer Houlihan.

Spencer Houlihan has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix.

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