This morning, we will be adding to our position in Disney (DIS) at roughly $146/share. Following the trade, our portfolio will own 22 shares of Disney at an average cost basis of ~$166/share. The addition will increase Disney's weighting in our portfolio from 11.5% to 14%.

We commented in the weekly round-up that we would be looking to assess the effects of the Omicron variant on portfolio names, especially ones that depend on travel activities. With developments throughout yesterday, we are ready to pull the trigger. First, we heard from CEOs of Pfizer and Moderna, and both sounded optimistic and reassuring that their vaccines will have the capability to fight off the variant (remember we haven't even seen the data on how the current vaccines work against the variant). Second, we heard from President Biden that lockdowns and restrictions are off the table, because vaccination and mask mandates will be enough. With these two reassurances, we feel that the Omicron-related sell-off will prove to be similar to the Delta variant-induced sell-off in the summer, and market will eventually be able to climb this wall of worry.

Why are we choosing to add to Disney (DIS) on this pullback? While the omicron variant has certainly added a headwind to the experiential side of Disney’s operations (think parks, cruises and theatrical releases), we remain long-term bullish and see an opportunity to reduce our overall cost basis. On the technical side, DIS is at an extremely oversold condition, and a bounce-back is to be expected (more to come later). Even though we are down 15% in this position and have a position that is 2% heavier than what we allocate for, we believe this is the time to buy, not to sell. Our heavy cash position allows us to make this move, as we will do to many other portfolio names in the coming days.  

On the streaming front, which is what seems to be the main driver of Disney's valuation, yesterday morning Loop Capital reduced their price target to $190 (from $205) citing a greater than expected increase in content spend to support the buildout of Disney+. Increased investments will hurt segment profitability, though help to achieve management’s 230 million to 260 million subscriber target. As long-term investors, we see nothing wrong when management decides to make investments for future growth. This shows management's hunger to deliver growth for the business. We believe that near-term weakness resulting from growth-oriented investments represent great buying opportunities.

On the experiential side of Disney's business, we believe much of the Omicron-related pressures have been priced in at current levels and when looking for names with Covid-oriented risks, we want to target those companies that have pricing power and proven to be in high demand as capacity restrictions are reduced. We believe Disney demonstrated these two factors very clearly when they last reported earnings. Recall, management noted that the company’s new Disney Wish cruise ship (launching in June of 2022) is already “nearly 90% booked,” and that they have realized significant pricing power as customers are adopting new guest experiences and services like Genie+.

Bottom line, we believe recent pullback represents an opportunity to add to our position in Disney. We believe that Disney will be a key beneficiary as pent-up demand is unleashed and that the increased content investments will not only allow Disney+ to achieve subscriber targets but also provide for a strong flywheel effect once content is fully ramped and experiential operating segments all allowed to operate at full capacity.

A Technical Take

Yesterday's price action produced what's known as a reversal candle, with lower prices during the day being bought, leading to shares closing at the highs. Yesterday DIS traded at ~2x the volume of recent days (21 mil shares compared to usual 12-14 mil). "RSI with Bollinger Bands" and "Williams%R" indicate a re-bound is to be expected sooner rather than later. Lastly, the accumulation/distribution line (bottom of image) has been moving up while the price has been moving down, this is textbook indication that there is buying pressure and the price will imminently reverse.