This year was not kind to shareholders of Walt Disney Co (NYSE:DIS) stock as it fell 17.1% between late April and early September. However, things now look much better and Disney stock is poised to rally 12% in the near-term and possibly break out for four times that gain in the long-term.
That is a bold call for a company perceived to be mired with problems, especially with ESPN sports network, the growing threat from streaming entertainment services and problems “cutting the cord” could cause for its cable TV properties. Just ask its broadcasting and cable competitors. They had lousy years, too.
However, there is one huge difference. The competitors do not have Mickey Mouse. And by that, I mean marquee character names and entertainment franchises. Disney’s stock problems are only recent and shares trade at about the same levels they did two years ago.
Now, flat performance is not exactly what shareholders want but Discovery Communications Inc. (NASDAQ:DISCA), for example, is down 35% in two years and 55% in three and a half years. That means something defended the stock over that span of time and that something is content.
Content Is Still King
Although distribution is giving established media companies headaches, content still rules.
A short list of projects gives Disney plenty of buzz despite a summer slump hitting all of the major studios this year.
- Guardians of the Galaxy sequel
- From the Avengers franchise, Thor: Ragnarok,
- Pixar’s Coco
- And of course, the latest Star Wars sequel.
Toss in continued record breaking attendance at its theme parks for a little extra gravy.
Mickey Mouse has been around since 1928. Disney acquired Winnie the Pooh, which is two years older.
And even the Pluto character was featured front and center when NASA’s New Horizons probe flew by the dwarf Planet Pluto in the summer of 2015. One prominent feature was easily identified by Disney fans in an Internet meme as the character of the same name
ESPN less of a factor
Just Monday, RBC Capital Markets (NYSE:RY) called Disney their top pick in the media sector, saying Disney reached a turning point as EPSN. That property now represents less than 20% of the earnings and Disney now focuses on beefing up its streaming and affiliate businesses.
An analyst at Wells Fargo & Co (NYSE:WFC) recently upgraded Disney as well. The report said that investors may need to start thinking about increasing exposure to those media companies with solid streaming strategies, such as Disney, and avoiding those who don’t have them.
Just as retailers that can adapt will survive the onslaught of Amazon.com, Inc. NASDAQ:AMZN), so, too, will evolving companies such as Disney survive the changes initiated by streaming monster Netflix, Inc. (NASDAQ:NFLX).
It’s simple Darwinism. Adapt or perish. Disney is adapting.
To the Disney Stock Charts!
The market agrees as the technicals show many improving signs. It does look that September was the bottom of this year’s slide and now for the first time in months we see money flowing into Disney stock. Technical indicators that look at the aggressiveness of bulls and bears, such as on-balance volume, now show rising trends, even as price has yet to formally break out to the upside.
However, that is short-term stuff and Disney stock is not yet out of the woods. That is why it pays to really step back and look at the stock’s long-term progress.
From the market’s bottom in 2009 through mid-2015, Disney gained more than 600%. Compare that to the S&P 500 index, which gained 210% over that same span.
Click to EnlargeBut that is where they parted ways. The market moved on to record-setting highs while Disney stock settled into a sideways pattern. Highs got lower and lows got higher as investors of both bullish and bearish persuasions became less sure of themselves. The ESPN slide, cord-cutting woes, the rise of streaming and even a few box office flops weighed heavily over the past few years.
The Market’s View on Disney is Changing
That seems to be old news now and investors start to nibble on shares again. A move back to the top of the pattern in the $112.00-area from current trading near $100.00 would not require much effort. That would be a good return for short-term investors and not even require a major change in the long-term condition of the stock.
However, if and when that the stock reaches that target, the analysis can easily shift towards a long-term breakout to the upside. The potential gain from there would be significant but let’s leave that discussion for a later date. Although, it is better to see good things down the road than not having that even up for debate.
There is one more bullish argument thanks to the ever-increasing bearish sentiment on the stock. Short interest – bets that the stock will continue to fall – jumped by $696 million during the past month. Investors “short stocks” by selling shares they do not own by borrowing them from others. They hope to profit by buying the shares back in the open market later at a lower price and returning them to their proper owners
This is a double-edged sword. If the stock does start to rally, even if only a little, short sellers scramble to buy shares back at higher, not lower prices. This adds fuel to the fire and keeps buying pressure higher. Since Disney is now heavily shorted, contrarians have another argument to like the stock.
Disney may not rally right away but it is set up to do so soon. Once it does get going, the market’s mood is likely to change for the better as they recognize Disney’s hidden value.
As of this writing, Neil Martin did not hold a position in any of the aforementioned securities.