Market Correction Shopping List, Pt. 1

Sharpening our pencils to identify attractive equities to buy long term amidst the COVID-19 market sell-off.

It’s good to have a shopping list of high quality stocks you want to buy when the going gets tough for the stock market. The COVID-19 virus scare has sparked a ~13% sell-off in the market in one weeks time. While the correction itself isn’t out of the ordinary (Since WW2 market has experienced on average an annual intra-year decline of 14%), the swiftness of the decline is. We haven’t seen this swift of a decline since the great depression.

If you have a long-term investment horizon like me (decades), now could be a good time to dip your toes in the water and put some cash to work. The name atop of my shopping list is Disney.

When should I buy Disney? Based on the chart, right around now may be a good time, for a few reasons. First, take a look at horizontal resistance. In technical analysis, old resistance tends to become new support and vice versa. Shares of Disney have given up ~5 years of gains, testing what used to be old resistance at the $115 - $120 level. Now shares of Disney are testing this range as new support. Additionally, shares of Disney are in a rising channel and the rising support is converging on the horizontal support/resistance level as well. Finally, shares of Disney have filled a massive April 2019 gap.



Why should I buy Disney? Disney is one of those rare wide-moat companies that you can count on in the long run based on its long, storied history. The company has consistently created a steady stream of iconic, high quality content for 97 years! Disney has an impressive, yet simple flywheel business strategy: Develop high quality content, usually in the form of movies/tv shows, then transfer the most successful characters/content to the other business segments ( theme parks, experiences and products, and direct to consumer).

As simple as that strategy may sound, Disney has executed in a way that turns every element of it into a money making machine: from surge pricing at resorts, to requiring mandatory renting of Disney baby strollers at its Star Wars parks, the company has figured out how to suck you in early and take your money. As @howardlindzon would say, a true 8 to 80 stock.

Disney has navigated the ESPN slowing growth storm of 2015 - 2018, and more importantly has made important moves that puts Disney at the forefront of everyone’s TV. The launch of Disney+ has beaten everyone’s expectations, as they are approaching 30 million subscribers in 4-5 months. That smashes their 1-2 year internal expectations. And given the content library, from Pixar and Marvel to Star Wars and Fox properties, Disney has plenty to play with in terms of generating original content that will be must watch TV for much of the population.

Despite all the positives, in the short term, Disney is negatively exposed to today’s COVID-19 outbreak. The company has closed several of its Asian theme parks, and the timing of their March 27th Mulan release is less than stellar given that it’s aimed at the Chinese audience and no one is going to the movie theater in China. A delay in theatrical releases in China build some pent up demand once the COVID-19 virus fears disband, but it’s an uncertainty.

The real question is how much of this is already priced in the stock? Between the COVID-19 sell-off and news of CEO Bob Iger’s sudden succession plan, shares are off more than 20% from its recent all time high.

If you think the COVID-19 fears will settle down in the coming months just like the SARS, H1N1, and Ebola fears did, then that, in combination with the solid fundamentals and appealing technicals, should make for an easy to stomach buy in your long term investment portfolio.

Comments

Popular Posts