Disney Stock Looks Underpriced. How to Play It Now.
Over the weekend, as the nation celebrated Independence Day,
played Hamilton on its Disney+ streaming-video subscription service.
The telecast generated nationwide excitement and scads of starry-eyed articles from trade publications to the New York Times, all of which raises some interesting issues for investors.
Amid the Covid-19 pandemic, streaming video has emerged as one of the key ways we entertain ourselves, exercise, and even gather with friends and colleagues.
Within such confines, Disney (ticker: DIS) is well positioned to thrive at a time when content that can be safely viewed from home is in hot demand. Disney’s extraordinary content catalog makes it a stock worth owning, especially at a time when it has fallen from favor.
Sure, there is the problem about Disney’s theme parks, which are difficult to operate during a pandemic and which appear to be the key reason the stock has performed so poorly this year. But the Hamilton experience is an indication of what the company can do to thrive even in the age of pandemics that disrupt theme parks and the creation of new movies.
So far this year, Disney’s stock is down about 21%. Over the past year, the stock has declined by about the same amount.
(NFLX), which is a pure-play streaming investment, is up 52% this year and 30% over the previous year. The businesses are similar in important ways (original streaming content), and different in important ways, too. There’s no Netflix World theme park anywhere in the world.
Yet at a time when many investors are worried about record-high valuations in the stock market, especially in the technology sector, Disney is worth considering. The company probably has another “Hamilton Experience” up its corporate sleeve.
Investors who agree could consider a stock-building strategy that entails buying shares and selling cash-secured put options.
The “half and half” strategy is designed to pay investors for buying Disney stock. Rather than buying, say, 1,000 shares outright, they buy 500 shares and sell five puts. (Each put that is sold gives the seller the option to buy 100 shares.)
With the stock around $113, investors could sell five of Disney’s August $110 puts for $4.30 each. The cash-secured put-write strategy positions investors to buy 500 shares of Disney stock at an effective price of $105.70 (strike price minus premium). If the stock price exceeds the strike price at expiration, investors can keep the put premium. The risk is that the stock falls far below the put strike price, obligating investors to buy the stock for more than it is worth, or to cover the short put.
During the past 52 weeks, Disney’s stock has ranged from $79.07 to $153.41.
The August expiration was chosen to cover the release of Disney’s third-quarter earnings, which will be posted on Aug. 4 after the markets have closed. The company’s management will likely discuss the great success of streaming Hamilton, and even offer some insight into its stay-at-home content strategy.
Over the long term, Disney’s stock has soundly trounced the
S&P 500 index.
This strategy expresses confidence that the company will do so again, and that streaming content will play an increasingly important role.