Disney (NYSE:DIS) shocked Wall Street this week by suspending its dividends. It wasn’t so much the fact itself that shocked investors, but rather, what it suggests. It was only weeks ago that former CEO Bob Iger left Disney as a very healthy company. Now there is concern over its cash position, which has some investors concerned about DIS stock.
However, the reaction off the headline wasn’t too bad — a mere 2% loss. The stock went a little green the next day, and so far it is holding there, so would I consider that a win for the bulls despite all the negative rhetoric.
The uncertainty surrounding the novel coronavirus puts most stocks into two categories. The first one includes the select few that I call Covid-19 stocks. These include companies like Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP) — they have never been busier. Versus the second group, which includes almost everything else — these businesses are severely hurt and perhaps permanently.
And that’s my concern for DIS stock — I think it could fit into the latter group, rather than the winners.
Since the world is still under quarantine, most companies have almost no sales flowing through their profit and loss statements. There are exceptions, but they are the oddities, not the norm. DIS stock has no silver lining in the crisis and it is suffering from the loss of income today. But my worry is longer term, even after the quarantine lifts. Normally I support buying every major dip in it, but this time is different. The biggest asset that Disney had was “crowds.” And that ace in the pocket is gone for a long time, if not forever.
DIS Stock New Hurdles, Even After Covid-19
Governments are talking about regulating congregations on an ongoing basis. This means that they plan on changing everybody’s lives forever. For Disney, it is possible that it faces restrictions that would force its maximum theme park capacity to half of its former levels. The same concept extends to the movie theaters, so it’s a double whammy.
The “new normal” for Disney is unknown until we get more information about the virus itself and how authorities want to proceed past this crisis. Maybe the fears will abate once we find a vaccine, but experts say that this may take years.
Fundamentally, it’s hard to argue points about value because the baseline assumptions are changing. This is almost like when Chipotle (NYSE:CMG) first had the food problem. CMG stock lost its main asset, which were the strong comps sales it delivered. Those came from “crowds” in their stores. It took them two years to recover from that. Similarly, Disney management has a successful history, but now the management team may shift along with its fundamentals.
Technically, DIS stock has support, but it could retest $91 per share. Also, if the market in general has another tizzy, it’s easy to knock it down to the Covid-19 low or beyond. I say beyond because if the bulls fail to defend the crash low, they risk triggering a more grim scenario. Logically this shouldn’t happen, and I am definitely not calling for it, but the scenario exists.
For those who don’t trust technicals, I offer the notion that they matter most when nothing else makes sense.
Charts Matter More When Fundamentals Are in Question
For the last few weeks Disney’s stock has behaved perfectly along the technical forecasts. They say “price is truth” because charts display facts, not feelings. Considering that over 80% of all trading is done by machines, this makes charts even more relevant. Machines need reference points to trade and that means Fibonacci ratios and harmonic patterns become self-fulfilling prophecies.
These are skills that investors should learn once and apply for a lifetime. Fundamentals are still very important, but it is so much better to have the added layer of technical knowledge to hone entry and exit points. For example, above $112.5 DIS stock can spike $8 from there, but I would not chase the trade until the trigger is confirmed.
I am pulling for Disney because it is a great American company and literally the representation of happy things. And in this time of doom, we need all the happiness we can get. Let’s hope this mouse gets the cheese.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
