Wall Street is in shambles this month and the bulls have lost control over the reigns. The small caps have already fallen 15% and the selling in the Nasdaq is accelerating even on good earnings reports from Netflix (NASDAQ:NFLX), Amazon (NASDAQ(AMZN) and Alphabet (NASDAQ:GOOGL). Needless to say, there is risk in the equity markets. But not all stocks are ready to be thrown away here. There are viable opportunities whose themes were in progress just before this correction. These are likely to resume once the edginess abates. Disney (NYSE:DIS) stock is one of them.
Here is a stock that rallied 20% off its lows in May and has only given back one quarter of the move. Usually frothy rallies quickly disintegrate. This one is still holding at $113 per share. Disney stock’s relative performance this month during turbulent times is encouraging.
This is not guaranteed to be the bottom on the DIS stock correction. But the catalyst levels on the way up have now become support levels to watch on the way down. That’s the good news, but there is definite reason to worry about Disney stock. But I rarely assume that I am picking the trough into any long position.
I do have concerns in this jittery market. The longer Disney stock fails to make a new high, the louder the chatter becomes that the stock already put in a double top. On the way up, DIS stock had important pivot points and if they are lost, they can turn into trap doors. Although these are not forecasts, I need to know that falling below $110 per share for DIS stock can bring another 5% to 10% deeper dip.
Disney earnings are coming soon, and those too are a potential liability to my investment. In this nervous stint, prudence reigns supreme. I don’t take an all-in position regardless of how attractive the outcome may be. We do not know how investors will react to the earnings regardless of earnings’ quality.
The Good News for Disney Stock
The fundamentals for Disney and Disney stock are strong, but we are merely a fraction away from an all-time high. In other words, there is more froth we can shed if this market-wide selloff persists. Add to that the binary nature of any earnings report and it makes it almost impossible to commit fully to even a stock as good as DIS.
To better its prospects, management recently made a bold move against NFLX in the streaming world. So far Netflix has had the first-mover advantage and is the behemoth in the field. Disney can give it a run for its money as soon as it launches its own streaming service.
Disney already has the content and can leverage their production dollars much easier than NFLX can. Netflix has to burn a lot of cash in order to generate excellent content to keep people engaged. The House of Mouse should have an easier time doing that.
Fundamentally, Disney stock is cheap. It sells at only 16 P/E ratio. So it’s not likely to be a giant financial mistake to own shares at this level for the long run. Nevertheless there is no need to rush into a full position right away.
The Bottom Line on Disney Stock
Markets are still nervous, so they will ignore the opportunities on specific stocks for fear that the collective move lower would drag all stocks lower.
Simply stated, what’s cheap now can get much cheaper at the drop of a headline.
Just yesterday, we saw a strong rally in equities evaporate on one simple rehashed headline about tariff war with China. There is risk in Wall Street here. So any position I start in stocks now has to be small so I can add to it if I need to. The same is true for Disney stock.
The overall macro-economic conditions still favor the bullish scenario for DIS. But there are risks to the overall market from tariffs what China and the Federal Reserve.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.