Astute 12 – DIS Trade

Market Context
Good day Insiders,

It is that exciting time once more, where we are going to buy our next stock. Having been a fan of this stock for the past few years due to excellent management with revenues and earnings growing at rapid rates. Not to mention the continuous success in releasing blockbuster movies that keep setting new records.

Why are we keen on Disney (DIS) now? Well, things are starting to get interesting. Consider the fact that revenues are up +10% over the past two years to just under $60 billion a year and earnings are up as much as 50%. Now for the first part of the interesting piece, over the past few years, DIS has remained range bound while their revenues and earnings have not. They’ve indeed been trending higher along with what all investors love, free cash flow, which has followed in kind. All these facts should have sent the stock higher and yet, it has been quite flat. The market is valuing the stock at the same price it was when cash flow and earnings were 25% and 50% lower respectively.

Now for the main course, Disney is set to enter the industry of streaming. This will put them to be competing with the likes of Netflix, Amazon, and Hulu to name a few. This news of their streaming service Disney Plus was announced in the fall of 2017 and once it was released, the hype quickly fizzled as Disney was not going to be launching it for a few more years.

Fast forward to 2019, Disney Plus is set to hit screens later this year and there appears to be no hype around it. Investors and traders seemed to have forgotten about the fact that Disney owns one of the most extensive and profitable portfolios in the world of entertainment.

Another piece worth considering, Disney owns Star Wars, Pixar, Marvel, the list goes on, but the kicker is that all those fan-favourite flicks are all going into their streaming service. Not to mention that Disney is in talks with buying another studio to allow them to feature non-Disney content. Combine that with their recent purchase of 21st Century Fox and all their intellectual property, it’s no wonder they’re looking to compete with the Netflix and Hulu’s of the entertainment world.

Investors and traders seem to have priced Disney without taking the added revenue of the new streaming service into consideration. It would appear that they have indeed priced the stock as if the streaming service is going to be a flop. The silver lining here is that given the beyond poor expectations investors are anticipating from Disney, even if they add only a few hundred million subscribers, Disney will have more than beat expectations. Given all the content and numerous acquisitions, there appear to be endless reasons for Disney to flourish. Provided the streaming platform is not abysmal, users will more than likely pay Disney for its content and potentially throw in the towel of other streaming services.

It is with this, we are going to buy Disney (DIS) stock. Remember that these trades can be placed in RRSP, TFSA and Roth IRA accounts.
The Trade
Due to the price Disney stock, we are going to start out small and purchase 200 shares.

The Hedge
Let’s protect our shares from potential downside. We will buy 5 contracts of the 107-102 put spread for April18 ’19 expiration.

Risk & Reward
Buying 200 shares will use an investment of $21,650 (not using margin). Combined with the put spread (1.52 x 5 contracts) $770. We are looking at a total of $22,420.