In late October, I shared a trade to go long Disney (NYSE:DIS) stock and to get paid quickly. DIS rallied to bring fast profits but the fade came soon thereafter. It has since given some back but relatively speaking it’s been a strong stock.
2018 has been a year to trade headlines. This means that I book profits quickly whereever I get them. I don’t overstay my welcome in any trade. This whipsaw action in the stock market has been the case all year. The prevailing notion now is to sell the rips and buy the dips.
Investors are jittery over a slew of tariff headlines. The United States in an economic war with the world and until recently we’ve had nothing but negative rhetoric about it. Moreover, we face the threat of an inverted yield curve in the United States. The fear there is, if that happens, a recession will follow soon thereafter.
But in the past few weeks, we’ve had reprieves on both of these headlines. Nevertheless, traders are leery as new headlines continue it to come out of the woodwork. Monday, we saw Apple (NASDAQ:AAPL) fall sharply on an obscure headline about halting the sales of its older iPhones in China.
Considering the environment, and that the S&P 500 is struggling to stay flat, Disney stock has held its own — up 5% in a year. It remains within an earshot of its all-time highs. This is in spite of its divestiture from Netflix (NASDAQ:NFLX) and the embarking on building its own online streaming service.
Usually, such projects are investors repellents but not in this case. Buyers are still persevering in spite of the concerns of ballooning expenses. This is not to say that it’s been smooth sailing for the stock. It had its own headlines all year long and it’s evident from the chart that there have been several 10% moves in either direction.
In April, it was under $100 per share; and just a few weeks ago it was trying to retest $120 per share. I am confident that, in the long run, if the stock markets are higher, Disney stock will also be higher. And therein lies the opportunity.
Disney Stock Trade
They don’t ring bells to indicate obvious entry points. But homework says that a proven stock like DIS has upside potential because the macroeconomic conditions still favor upside in the stock markets. It only sells at a 15 price-to-earnings ratio so it is cheap. This is a company that has incredible assets that are staples worldwide. There is hardly a soul that doesn’t know its characters or destinations.
The way we consume media has already changed. Netflix proved the model that we prefer streaming our content. DIS recognized it and they are steering the ship to match the tide. The adoption rate is accelerating at an exponential rate and there is no turning back from it. Every smartphone is a potential subscriber.
Disney is committed to launching its own online streaming platform. Considering its long-held and current success with the younger demographic, I’m betting the buy-into any Disney streaming platform will be huge!
The House of Mouse doesn’t need to spend much on the content; they simply turn on the spigot and the income will roll in.
Technically, there are serious worries. DIS stock is testing a recent pivot zone around $108 per share. If the stock trips over it then it could drop another $4 lower from there. Furthermore, it may already be in a bearish pattern that was triggered off of the $112 per share.
Both of these facts agree with similar same worst-case scenarios that are not yet here. This is all to say that there could be more downside from here and it would most likely be dependent on the market wide move.
Conversely and in other words, if the stock market bounces from its funk here, then DIS stock can also revisit the high end of the recent horizontal range. Otherwise, it could have more downside to go but given its fundamentals and value then that should be limited. The long-term bet on Disney will bring great rewards.
During uncertain times like there, it is best to add stocks in tranches. Meaning it is best to take small bites rather than swallow the DIS sandwich whole.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. 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.