It’s time to join the dark side and fade the force of a weakened bullish trend in Disney (DIS). Star Wars wordplay aside, as an expensive stock facing potential headwinds, Disney stock looks well-positioned for the bears.
Just because a stock has made a large price run doesn’t mean it’s expensive. But in the case of Disney stock, and after gains in excess of 500% since 2009’s bottom, the price of admittance is ripe for bearish positioning.
For starters, Disney stock trades at a premium to the broader market. There’s simply no way to get around Disney’s steep trailing price-to-earnings of 23.7 and its reduced (but still high) forward multiple of 18.7; that compares to its five-year average multiple of about 18.
I’d go on to wager that any growth estimates for the Disney stock price by Wall Street’s adoring analyst community are already pricing in even the most optimistic expectations for Star Wars: The Force Awakens. But if the film is a fiasco (like the rightfully maligned Jar Jar Binks) there won’t even be an opportunity to “sell the news” on a fleeting uptick in DIS stock.
Another potential drag is that we may be at a point where investors might consider weakened consumer sentiment and dampened spending as negatives to the Disney stock experience. Our thoughts: It’s not going to be priceless, and it could prove painful.
These days, a fun-filled day for a family of four at Disney’s Magic Kingdom costs over $400. That’s sans the ridiculous parking fee, overpriced food and mostly forgettable, but expensive, doodads that will be invariably purchased to keep li’l Sally from bawling all afternoon.
Further, ESPN is another potential headwind for Disney stock. As viewers disconnect, a secular trend away from cable television is potentially damaging (though ESPN’s sheer size and exclusive contracts mean it’s not going down in the first round either).
And the dirty business with regulators and daily fantasy sports has forced Disney to bail on its $250 million investment in DraftKings, and thus $500 million in ad spend.
DIS Stock Monthly Chart
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A breakout from its massive multiyear double-bottom base resulted in a strong bullish change of character for DIS, but those days now appear to be numbered.
Disney stock is currently trending toward a lower high double-top as part of its V-shaped bottom formed during late August’s notorious flash crash episode. Incidentally, the weak technical pattern was kick-started following Disney’s earnings report in early August, which featured worries over ESPN’s subscriber growth.
Over the next several months, looking forward to the dark side of lower prices in Disney stock, I’m looking for a test of the $75 to $85 retracement area.
The support zone is defined by the 38% to 50% Fibonacci levels dating back to DIS’ pre-breakout low in 2011, and would allow for a nice compression of hype and Disney stock’s price multiple.
But first, let’s look at a smaller, but smart, initial step onto the dark side.
Disney Stock Bear Put Spread
What’s the price of admission to hop on board Disney stock as a bear? A whole lot less than taking the family out for a day to the Magical Kingdom, that much I can assure you.
Checking Disney stock’s options board, the Jan $110/$105 bear put spread for $1 or less is attractive. With shares of DIS just above $116, a breakeven of $109 requires about 6% of downside.
A bit of additional follow through of about 3.5% or 9.5% in total would allow for profit capture of $4, or a 400% return on investment with Disney stock below $105 at expiration.
This bear vertical doesn’t fully position for the larger described downside target in Disney. But given this position has a couple months to play out (combined with Disney stock’s above-market beta of 1.48 and the broader market’s tenuous footing right now), fading the force as a bear with this DIS put spread looks like a good first step in that direction.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
(Editor’s Note: This article has been corrected to reflect Disney’s now-defunct deal with DraftKings)
