Ashley Broke Her Own Rules with Disney

I broke the rules with Disney. When Coronavirus struck and the stock market started going bonkers, I was first drawn to the obvious candidates for undervalued companies- airlines and cruise lines. After I got that out of my system, I started looking around for solid businesses that were hit hard by the pandemic.

Disney is a pretty obvious one- their parks have been completely shut down for a still undetermined length of time. I am very confident that the parks will eventually reopen and that they will find solutions for lingering Coronavirus concerns. This seemed like a textbook example of a market event that would impact the business for a year or two at the most before returning to its former levels of business. I was also wowed by the Disney+ subscription numbers and pleased that the income from their new streaming services could offset the temporary loss from the parks.

Beyond all that, Disney has an incredibly strong brand moat. There are fans out there with mouse ears tattooed on their bodies. Disney movies are a bedrock of American culture. 

How did I decide on my buy price?

This is the part where I broke the rules. What I should have done was determined the intrinsic value of the company per share and then cut that value in half to give myself a 50% margin of safety.

What I actually did was look at the stock price graph and get fixated on the fact that the price had fallen 50% from its 52 week high, but was already starting to inch its way back up. The price was up to the low $100's when I started looking at it. I set an alert on my phone for when the price dipped below $100 and managed to snag a few shares and felt pretty proud of myself. I figured if I could get in at $99 then I could hold tight for a few years until Disney made its way back up to its former heights of $150 and make a whopping 50% ROI.

This is where my major fallacy was. THERE IS NO GUARANTEE PRICES WILL GO BACK UP TO WHERE THEY WERE IN THE NEXT DECADE. I'm of the opinion that we are on the brink of a recession, but I kind of had this idea stuck in my brain that the businesses that survive will bounce back to the prices they were going for when as soon as we pull out of it. But if so many businesses were overpriced, what is more likely is that they will go back up to their appropriate prices. Looking at the drop from 52 week high is not something worth doing. I should be trying to determine the actual value and find the discount from that number.

So what is the actual value?

Analysts were predicting 5% growth on some sites and 23% on other sites. My $99 buy in price only meets my 50% margin of safety goal if the most optimistic of analysts are correct. I think somewhere in the 10-15% range is more accurate because it is hard for behemoth companies like Disney to keep growing at their current rates. This means I paid around sticker price and my Margin of Safety price should be around $55. I also ran the 10-Cap and Payback Time valuations using the techniques outlined in Phil Town's book "Rule #1." I came up with $98 and $58.

After doing this analysis, I do regret getting in at $99. I don't have a margin of safety on getting my minimum goal of 15% ROI. I would breathe a little easier if I got in at the lowest price we have seen so far which was $79, but even then I wouldn't be confident about meeting that 15% goal.

Carlos persuaded me to stay in despite of this, at least for now. Disney is a company with solid fundamentals and a track record of management successfully adapting to the times. DIS is a small part of my portfolio. I bought a small number of shares, hoping to buy more as the price fell even lower. I don't think I will buy in more unless it drops down to the $50 range, and I may sell if I find a better opportunity.