Yahoo Finance says DIS is now trading near ‘Fair Value’? So, is it time to buy a few shares, or is it better to wait until the stock falls even further in price? (You do know its 52 -week high was 187 compared to its present sub-108?)
Hard to say, right? given that the company’s directors seem as determined as ever to put radical, leftist, Marxist policies ahead of their fiduciary responsibilities to preserve or enhance shareholder value. Oh, well.
Get woke. Go broke.
given that the company’s directors seem as determined as ever to put radical, leftist, Marxist policies ahead of their fiduciary responsibilities to preserve or enhance shareholder value. Oh, well.
Can you be more specific.
tecmo
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Arindam,
Yahoo Finance says DIS is now trading near ‘Fair Value’? So, is it time to buy a few shares, or is it better to wait until the stock falls even further in price? (You do know its 52 -week high was 187 compared to its present sub-108?)
Hard to say, right? given that the company’s directors seem as determined as ever to put radical, leftist, Marxist policies ahead of their fiduciary responsibilities to preserve or enhance shareholder value. Oh, well.
If you don’t hold a position and want to acquire one, the best strategy is to “dollar cost average” in over the course of several months or even a year or two. Basically, the strategy is to make purchases in fixed dollar amounts at regular intervals over some period of time (for example, invest $25,000 by purchasing as many shares as you can with $2,500 every other Monday, so the last purchase will be eight weeks after the first, or on the first trading day of every month for ten consecutive months, so the last purchase will be nine months after the first). This strategy guarantees that you will buy more shares when the price is low and fewer shares when it’s high so the average cost per share will be lower than the average of the prices at which you make purchases.
Once you have a position, regular rebalancing based on target allocations is the way to profit from the volatility of the market.
Norm.
Norm,
There are companies whose shares I’d like to buy, e.g., HD, LOW, that seem to be well managed and whose products/services I use. (I.e., the Peter Lynch model of investing.) But I don’t want to be buying them while their stocks are still overvalued as Ben Graham would run the numbers and make estimates of ‘fair value’.
The chief macro-economic fact that concerns me is the currency war that the US has provoked. ‘Dedollarization’ is happening, and it will trash our economy, hence, our financial markets. The US could strengthen the $US by cutting back on its printing and by (at least partially) pegging to gold and/or a commodities basket. But it lacks the foresight and will to do so. Hence, we’re facing a multi-year recession, if not depression. (That’s the war that Putin has already won, not whatever might be happening in Ukraine.)
No one will know where “the bottom” is until afterwards. E.g., who knew on March 9, 2009 that that day was “the bottom”? I didn’t. But I had begun my buying campaign in January and ended the year up 34% because of it and up 20% the following year. That’s serious money. Right now, we’re still not in a comparable situation, and I think it’s too early to start a serious campaign of averaging into positions in anything except hard assets, and there, I’m only nibbling.
Arindam
I first heard about “dollar cost averaging”, and “drip” plans here on the FOOL 20+ years ago and have been using them with good results ever since. Using Disney’s automatic purchase plan plus their drip plan I was able to accumulate 600+ shares over the course of a few years and then slowly trim back on my holdings as the share value increased.
It was a great way to build some retirement savings and to generate some additional income.
Walt
Arindam,
There are companies whose shares I’d like to buy, e.g., HD, LOW, that seem to be well managed and whose products/services I use. (I.e., the Peter Lynch model of investing.)
I’m a firm believer in that model. When I’m considering an investment, there are always two questions to which I ascertain the answers before I even consider looking at the company’s financials, and that I continue to monitor after investing.
- What is the customer’s experience of the company’s products and service?
- How does the company treat its rank and file employees?
There’s usually a very strong correlation between good customer experience, well-treated employees, and prospects for growth. Companies that drive away customers with bad products or bad service have to replace the customers that they lose before they can grow. And companies that drive away employees have to spend a lot of money hiring and training replacements before they can grow. Thus, if either of these “goes South,” that’s about as strong of a “SELL NOW!” signal as you can get. Peter Lynch was so successful precisely because he read these signals and got out of the stock before the downturn in sales showed up on the next quarterly report, when many investors would jump ship causing the price to drop.
But I don’t want to be buying them while their stocks are still overvalued as Ben Graham would run the numbers and make estimates of ‘fair value’.
Valuation metrics inherently depend upon speculative projections of a company’s future growth – and here, the disclaimer that appears in every prospectus for a mutual fund is very relevant: Past performance does not guarantee future results.
The chief macro-economic fact that concerns me is the currency war that the US has provoked. ‘Dedollarization’ is happening, and it will trash our economy, hence, our financial markets. The US could strengthen the $US by cutting back on its printing and by (at least partially) pegging to gold and/or a commodities basket. But it lacks the foresight and will to do so. Hence, we’re facing a multi-year recession, if not depression. (That’s the war that Putin has already won, not whatever might be happening in Ukraine.)
I don’t know where you are getting this concern. Blumberg’s Currency Cross Rates table (https://www.bloomberg.com/markets/currencies/cross-rates for data) shows that the dollar is stronger now, compared to other currencies, than it has been for a couple decades. A day or two ago, I also noticed an article on Microsoft’s news feed about a big drop in the value of cryptocurrencies.
No one will know where “the bottom” is until afterwards. E.g., who knew on March 9, 2009 that that day was “the bottom”? I didn’t. But I had begun my buying campaign in January and ended the year up 34% because of it and up 20% the following year. That’s serious money. Right now, we’re still not in a comparable situation, and I think it’s too early to start a serious campaign of averaging into positions in anything except hard assets, and there, I’m only nibbling.
Here, I would refer you to the book Stocks for the Long Run by Jeremy Seigel which presents a very solid analysis of the performance of the U. S. stock market since the New York Stock Exchange first opened in 1800. If you look at a short time period, a lot of oscillation dominates the graph. But if you look at a longer period, there’s a very clear upward trend centered about a line on a semilog plot with a compound average annual growth rate (CAGR) of 10.8% per year. Mathematically, a logarithmic regression yields the line through the middle of the data. There’s also a “boom” envelope, which is the maximum of the upward oscillations, at twice the regression line and a “bust” envelope, which is the minimum of the downward oscillations, at half the regression line. All of the oscillations lie between these two envelopes. So when the market hit bottom on 09 March 2009 and again with the COVID shutdown in March of 2020, people who were familiar with these envelopes knew that it was not going lower.
In recent history, the market was pretty much stuck on this bottom envelope from March of 2009 until November of 2016, when it started to come off of it – reaching an all-time high before the 2016 election only because the 10.8% CAGR raised the bottom envelope above the previous high – and it has not reached the regression line, which indicates normal economic conditions, during the pre-pandemic start of a recovery.
You can use whichever index you like to figure out where the market is. I normally use the Dow-Jones Industrial Average (DJIA) because it’s the most accessible. Here’s approximately where this band currently sits.
Top Envelope: 88,800
Regression Line: 44,400
Bottom Envelope: 22,200
The DJIA is hovering around 32,300 as I write this, putting it about midway from the bottom envelope to the regression line. This tells me that the market has a LOT more upside potential than downside potential.
I’m actually using a variable cash allocation now. My formula is:
C = 20% x (log (I/B)) / log 2 + 10%
where C is the cash allocation, I is the current value of the index, and B is the bottom envelope of the index. This produces a cash position ranging from a minimum of 10% when the index is on the bottom envelope (maximum upside potential) to 50% when the market is on the top envelope (maximum downside potential), with a cash position of 30% under normal market conditions (index on regression line). This calculates a current cash allocation of about 21%.
Norm.
I don’t know where you are getting this concern. Blumberg’s Currency Cross Rates table (https://www.bloomberg.com/markets/currencies/cross-rates for data) shows that the dollar is stronger now, compared to other currencies, than it has been for a couple decades.
Norm,
My data sources don’t suggest a different pattern than you see, namely, that the $US is stronger against the major and minor pairs except for the ruble and the real. It’s my interpretation of the data that’s different.
The $US dollar is being priced higher than the alternatives for two reasons. (1) It’s the least dirty shirt in the laundry basket of fiat currencies. (2) The rest of the world knows they will be bombed and invaded (or at least sanctioned) if they try to dedollarize. (Saddam was moving toward pricing oil in Euros when the US invented the WMD scam and invaded. Iran tried to launch an oil burse using Euros. They got accused of having a nuclear weapons program that no one has been able to prove and were crippled with sanctions. Gaddafi wanted to roll out a pan-African dollar pegged to gold. He was murdered and that country was destroyed.) In short, the present strength of the $US isn’t based on us having a strong economy but on our willingness to militarize our currency.
However, with Russia, China, India, and Brazil the US has met its match, and it is losing that currency war. Were this not so, domestic inflation would be tame, which is why the Fed’s raising of interest rates will fail. For sure, the MMT theorists at the Treasury can keep printing. But what will Americans be able to buy with those dollars? Want lithium, or cobalt, or grain, or heavy crude --needed for diesel–, then be prepared to pay more or to use the currencies of other nations, which is the spill-over effect of printing $US dollars. 2/3ds of the world’s economies don’t want them and the risks that come with accepting them. Higher prices will translate to lower domestic economic activity, which which have a double-whammy effect on companies like Disney. When people are scrambling to put food on the table or to meet mortgage or rent payments, they aren’t going to be buying Disney’s services or products, which doesn’t worry me. Companies come and go. What I do worry about is the sort of hyper-inflation we experienced in the '70s coupled with the hyper-surveillance state the US has now become.
Yeah, I sound like a right-wing nut. But I do know that donuts don’t cost a nickel any more, as they used to when I was a kid. I can’t send a letter for 6-cent stamp, etc. Years ago, when I was paying for college by working in a steel mill, the older guys would talk about the days when just $10 bucks would fill up the back seat of their car with bags of groceries. These days, $10 bucks will buy the makings for a salad for a family for one meal, not feed them for a week. Already, Russia is demanding --and getting-- rubles for its energy exports. India is paying in rupees. The Chinese in yuan. SWIFT is being bypassed, hence, the ability of the US to impose effective economic sanctions on anyone but its own citizens. Not A Good Thing, especially since the US could have kept its counterfeiting scam running forever if only it had exercised a bit of restraint. Heck, even the US staunch Mideast ally, Israel, is reducing the amount of $US dollars in its currency account and replacing them with rubles and yuan. The bottom line --for me-- is this. When the US can’t print freely, our economy will contract. When the economy contracts, so will the financial markets. When that happens, pension plans will fail beyond the means to bail them out. A depression worse than the '30s will result, and a lot of people are going to get hurt.
Let me get a bike ride in, and then I’ll pick up on other points you made.
Arindam
“Here, I would refer you to the book Stocks for the Long Run by Jeremy Seigel which presents a very solid analysis of the performance of the U. S. stock market since the New York Stock Exchange first opened in 1800.”
Norm,
I haven’t read his book, because of the criticisms that are leveled against it, the chief of which is this. “Past performance… yadda, yadda”, not that “this time” is ever different. But the argument that dissuades me reading his pitch for equities is that equities aren’t the path I followed myself. I’m a bond guy. That’s the asset-class I prefer. If --as Seigel claims-- betting on stocks pays more --on average and over the long haul-- than betting on bonds, it’s because --on average and over the long haul-- the game is riskier. That’s how markets work, or else the arbs step in to make it so.
Yeah, I bought my first stock when I was ten, doubled my money and thought investing was easy, a huge mistake it took many decades to unlearn. There’s nothing easy, obvious, or risk-free about putting money to work. Your counter-party to every stock purchase (or bond purchase) is meaner, faster, better informed, and better capitalized. But bonds mature, and stocks don’t. Also, most institutions can’t own spec-grade bonds, and most investors are scared enough of them that the risk-prem that used to attach to the asset-class was to be able to be captured, which forgave a lot of learning mistakes.
These days, however, the bond game has changed too much to be worthwhile. There’s no more buying Xerox’s 8’s of '27 for 34 and tripling your money within a couple years, as prices went to par. So, I’m having to rotate into equities out of both necessity and convenience. But I’m unwilling to do so with much money until there really is the financial equivalent of John Templeton’s “blood in streets” or Ben Graham’s “straw hats in December at fire sale prices”, which is why the decline in the price of Disney’s stock is puzzling.
The fundamentalist website I depend on for vetting stocks, SimplyWallStreet, estimates ‘fair value’ for DIS is $232 (down from a previous $246) and forecasts earnings to grow at 22.4% per year. So why did it close at $107 yesterday, and why is it trading down from its high of $200 just over a year ago? Politics aside, Disney isn’t any more disgusting or evil than a tobacco company, a weapons manufacturer, a gold miner, a casino, a payday lender, the banksters, the pot companies, etc., all of whom wouldn’t meet ESG screens. Its present low price is puzzling. But as long as the stock is being sold down, there’s no reason not to suspect there’s bad news coming out that isn’t yet public. That’s also how markets work. Prices discount the future, and traders seem to be betting that the future for Disney doesn’t look good.
Arindam
Arindam,
From a technical perspective, it would be difficult to believe DIS won’t breach the 52-week low and head lower. No one - not one single person – can predict the future. However – seriously, what else can be said? If technical analysis works at all, even sometimes, I’d say $106 becomes $105, and then start the countdown again…(only thing is, I’m anticipating better volume confirmation in future trading days; and of course earnings is tomorrow…flip a coin if you want to know if a short-cover rally occurs) The overall market is bad and is going to take everything right now
I seem to recall - and I may be wrong about this - but didn’t Gross bet against treasury bills (or some category of bonds) back during the '08 crisis and lose that bet? The reason I bring that up is, I would agree, it would seem bonds and the dollar and all that will be demolished (I thought so back then too), but as you stated, the dollar is simply the currency of last resort, or perceived as such. For some reason, that seems to offer garlic-like protection against the market vampires. I’m not an expert on any of this, just something I was thinking as I was reading.
When you say fair value from that website - and again, I am not an expert, you definitely probably could teach me more than the other way around - I assume you mean DCF. It seems to me impossible to truly come up with a realistic fair value for anything given all the assumptions that have to be made. We won’t know what happens tomorrow let along years from now. It’s good to have, something, sure, but when that website says DIS is fair at $232…well, sure, I guess if we ignore the actual values and just look at the drop from $246 as a proxy for what’s going on, hey, maybe the actual numbers don’t matter…but DIS in my opinion, and I’ve been saying this for a while, reads expensive to me and nowhere close to even that proxy drop…if the numbers can be anything, then maybe the drop should read $246 → $180! But if the numbers do for some reason mean to be taken literally, I can’t see $232 being realistic at all, unless analysts have some secret estimates somewhere that will turn out to be right!
We got through '08, we’ll get through this. For many investors, buying now and averaging in as Norm mentioned is best. You are in a different situation, judging from your info, in terms of the sum you manage. You probably will have to be more careful. When you ask for a reason why DIS might be trading so low, my own guess (and as I said, I have thought DIS to be expensive for a long time now based on some metrics) is because the parks still could be subject to new strains of SARS, theaters too, and the company does still have a lot of debt…add to that, free cash flow needs to get back to par and above. Kind of arbitrary to say this, but DIS below $100 (and it feels like it will get there, I have no way of knowing) is probably when to start to look. Either that, or some quality REITs, maybe? Preferreds? What did you do during '08, out of curiosity, how did you get through that…(lastly: I would agree, by the way – the blood hasn’t really started yet)…
“…but DIS in my opinion, and I’ve been saying this for a while, reads expensive to me…”
esxkom,
BINGO! That’s exactly it! (When all else fails, choose that which is the simplest explanation.)
Forget politics. Forget DCF. Just look at DIS’s ratios. Its PE is 62.3x compared to the US Entertainment industry average of 20.9x and the broad market’s 15.6x. (Ouch! Peter Lynch wouldn’t look at anything over 15x.) DIS’s PEG is a high 2.8x. PB is 2.2x compared to the industry average of 1.7x. In short-- as you said-- DIS is very “expensive”.
At some price, anything is a bargain, and it should be bought. At other prices, the prudent thing is to stand aside. Mystery solved. Disney’s stock is NOT a good buy, no matter its past history of being a profitable, family-oriented company and whatever its prospects might be for future earnings.
Let me get through the trading day, and then I’ll get back to you on the other shrewd points you made.
Arindam
Forget politics. Forget DCF. Just look at DIS’s ratios. Its PE is 62.3x compared to the US Entertainment industry average of 20.9x and the broad market’s 15.6x. (Ouch! Peter Lynch wouldn’t look at anything over 15x.) DIS’s PEG is a high 2.8x. PB is 2.2x compared to the industry average of 1.7x. In short-- as you said-- DIS is very “expensive”.
Looking at a simple metric such as current PE seems very short sighted with Disney - who are in investment mode and coming out of a global pandemic. TTM EPS is $2.28 per share, but they seem very capable of earning $8.00 in a “normal year”. If you think things can return to normal then the stock looks cheap! $110 / $8.00 = 13x. Even if you think Disney+ is going to require a lot of investment and knock earnings down to $6.00 per share the multiple is still under 20x.
They just pulled in $1.09 in earnings this quarter, which is up $0.49 for the same quarter last year; so things look to be returning to a more normal state soon.
tecmo
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Arindam,
The $US dollar is being priced higher than the alternatives for two reasons. (1) It’s the least dirty shirt in the laundry basket of fiat currencies. (2) The rest of the world knows they will be bombed and invaded (or at least sanctioned) if they try to dedollarize. (Saddam was moving toward pricing oil in Euros when the US invented the WMD scam and invaded. Iran tried to launch an oil burse using Euros. They got accused of having a nuclear weapons program that no one has been able to prove and were crippled with sanctions. Gaddafi wanted to roll out a pan-African dollar pegged to gold. He was murdered and that country was destroyed.) In short, the present strength of the $US isn’t based on us having a strong economy but on our willingness to militarize our currency.
That’s an interesting theory of the history of past events, but I’m not aware of any evidence to support it. Even this country’s traditional major media, which lean heavily left, did not report such happenings.
However, with Russia, China, India, and Brazil the US has met its match, and it is losing that currency war. Were this not so, domestic inflation would be tame…
I don’t agree with that analysis.
The real story is that the present administration blundered badly by choking off production and distribution of domestic petroleum by (1) shutting down a major pipeline project and (2) withholding permits for domestic drilling. It’s a basic issue of the economic law of supply and demand – with supply thus constrained, the price of petroleum, and thus of petroleum products including gasoline, home heating oil, and diesel fuel goes up until demand falls to match the available supply. Of course, that raises the cost of everything – farmers need these products to power their farm equipment, increasing the cost of growing agricultural products, every raw material has to be transported to the factory that uses it, and every finished product has to be transported to the market where end users buy it or delivered to end users. This triggers a vicious cycle where workers need more pay to maintain their lifestyles, causing another round of increases, until all wages and prices go up by the same ratio as petroleum. This happened after the OPEC oil embargo in 1973, and it’s happening again now.
Russia’s invasion of Ukraine exacerbated this situation by imposing further political constraints on supply, to be sure, but it was the administration’s action that started the chain reaction.
The way to solve the problem is simple – issue permits for enough domestic production of petroleum to match the demand, with enough extra to supply Europe and other places impacted by the embargo of Russian petroleum.
… which is why the Fed’s raising of interest rates will fail.
Well, raising interest rates will not do a thing to reduce inflation, to be sure. But it’s still the right course of action because interest rates need to correlate with inflation to maintain parity.
BTW, note that higher interest rates won’t affect existing bonds, which are losing considerable present value with the rate hikes, or existing “fixed rate” loans. The beneficiaries will be current borrowers, who will pay existing loans with highly inflated dollars – again, as benefitted people who had outstanding loans five decades ago.
Higher prices will translate to lower domestic economic activity, which which have a double-whammy effect on companies like Disney. When people are scrambling to put food on the table or to meet mortgage or rent payments, they aren’t going to be buying Disney’s services or products…
There will be some impact, to be sure. Many people will choose less expensive vacations, or even staycations, over visits to Disney’s resorts. OTOH, that may increase demand for services like Disney+ and movies that are less expensive than live Broadway shows other entertainment options.
Norm.
Here are some of the details around the investments in Disney+.
Quote: For the time being, Disney is losing money on streaming — which never used to be a problem. Disney reported an operating loss of $887 million related to its streaming services in the quarter — up from a loss of $290 million a year ago. For the first six months of Disney’s fiscal year, it has lost about $1.5 billion.
https://www.cnbc.com/2022/05/11/disney-needs-new-story-to-te…
So we can expect in a normal year for margins to improve from current levels. The Disney+ investments account for about 0.50 / share in earnings right now. So if Disney+ can get to break even then we can expect $1.58 vs. $1.08. Once they work through this initial investment period the stock is going to look dirt cheap as the earnings start to jump.
PS: I think there is tremendous pricing power in Disney+; I would expect the price to rise to $9.95 / month as soon as they get the initial subscriber base in place.
tecmo
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