On last night’s Mad Money with Jim Cramer, he discussed his investment thesis as it pertains to the home entertainment business.  On a show known for the “Lightening round” and fielding questions on the fly, he devoted about as much time to this topic as he will allot to anything he does.  Utilizing our RazorWire tool, we have collected almost the entire discussion and provided it here for our readers because we think he has an interesting perspective.  Essentially, Coinstar’s (CSTR) Redbox kiosks are where the growth is, but the market still has the company valued similarly to the more established business Netflix (NFLX).  Cramer alluded to a paired trade strategy to hedge this theory, which he said he would use were he still at his hedge fund today.

“The home video rental interest has a non-bricks and mortar and mortar variety. There’s two ways to go. There’s Netflix and now a new one, Coinstar, that’s Redbox. You may have seen their DVD rental kiosks in the supermarkets, drugstores, mass retailers like Walmart and convenience stores that rent DVDs for just $1 each. So you could say it’s Netflix here, okay, and Redbox. These are both good companies. This is a great growth industry. But back to my hedge fund, I do what we’d call a paired trade…

I never recommend shorting stocks on this show. It’s too dangerous for most non-professional investors. That said, I do want to go through this educational exercise because with these two stocks, Netflix and Coinstar, this is a great way to get rid of the risk. By betting against another company in the industry, what you’re doing is hedging out the risk that home entertainment will turn out to be a flop. Because you’re buying the best company in the industry, the two trades shouldn’t cancel each other out. You may not make as much as you would like if they both go up, but I believe, here it is, Coinstar, that’s Redbox, should go up more than Netflix. I think it’s the better story. And Netflix, I believe, will go down more than Coinstar if the whole DVD rental industry goes south. That’s how hedges work. Hedge funds, they hedge. That’s a hedge.

So why do I think that Netflix isn’t as good as Coinstar? First of all, you can like both. I know I do. But in a paired trade, you only buy the best and sell the not as good in case your thesis turns out to be wrong. I think Coinstar is the one to I’m going to give you.