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Buy Disney Stock as It Breaks out to New All-Time Highs

Disney stock - Buy Disney Stock as It Breaks out to New All-Time Highs

Source: Baron Valium via Flickr

Is anyone else noticing Disney’s (NYSE:DIS) timely breakout to new all-time highs? Despite the market’s struggles so far this month, Disney stock is up about 2%. However it’s the move over multi-year resistance that’s getting investors’ attention.

After outbidding Comcast (NASDAQ:CMCSA) for most of the assets from Twenty-First Century Fox Inc (NASDAQ:FOX, NASDAQ:FOXA), Disney is doubling down on the “content is king” mantra. By rolling out its own streaming options, investors are starting to warm up to the House of Mouse, now that they see a more clear future vs. Netflix (NASDAQ:NFLX).

Yes, Disney had to pay more for Fox’s assets, didn’t land Sky plc and won’t knock Netflix off its perch, but there’s room for more than one player in the streaming business. With its library of popular content, Disney is insuring that it will be on the podium rather than watching from afar. That’s precisely what investors want to see: action.

But what about this breakout?

Trading Disney Stock

chart of Disney stock
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Source: Chart courtesy of

It’s been a choppy, frustrating and long road for Disney stock investors. Ultimately this breakout has been brewing for at least a few weeks, if not a few months. DIS stock flirted with the move when it jumped over downtrend resistance in mid-summer, although it wasn’t able to hold onto those gains.

In late-September, Disney made new highs as it pushed above big-time resistance, but then October’s swoon knocked it down. Despite the recent volatility, it ended near its highs last Friday, as seen on the weekly chart above.

What now? Aggressive buyers can step in and buy DIS stock now that it’s breaking out. Conservative investors will want to wait for a pullback in the name. How much of a pullback is up to them and how conservative they want to be in this trading environment.

For buyers near current levels, shares should have support down to about the $110 to $112.50 level. Below that and the breakout has failed, technically speaking. It will put Disney stock into no man’s land for the time being, until it can gear up for another test of the highs.

Valuing DIS Stock

Okay, so Disney stock is breaking out, but what do the fundamentals look like? For those that like to marry solid fundamentals with attractive technicals as I do, you’re in luck.

We’re three quarters of the way through fiscal 2018 and growth is pretty solid through the year. Analysts expect earnings to grow almost 22% this year as sales churn higher by 6.7%. Those are pretty respectable numbers, but forecasts for 2019 cast some disappointment on Disney’s growth profile.

Analysts currently expect earnings to grow just 6% on the back of 2.5% sales growth. That’s admittedly not great. We don’t like our stocks to go from great growth to just okay growth and that’s what we have with Disney.

However, that’s where the valuation comes into play. DIS stock trades at a rather reasonable 17 times this year’s earnings forecast. That’s a reasonable valuation for a blue-chip company like Disney that should continue to benefit from a strong economy.

Movie ticket sales, theme park admissions and consumer product sales should remain strong so long as consumers have money in their pocket.

Disney pays a rather modest 1.5% dividend yield, but management has been committed to growing that dividend over the past few years. Those plans may take a temporary backseat in the immediate aftermath of the FOX deal, but it will be worth it in the eyes of investors. DIS isn’t exactly an income-only stock, given that Disney only pays its dividend twice a year.

Still, the move to buy Fox should make it stronger. It will allow Disney to increase its content, doubles its stake in Hulu and can build out better streaming platforms.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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