Rogue Bum – Disney (DIS)

by riskreversal October 13, 2016 10:13 am • Trade Ideas

Shares of Disney (DIS) are trading at its lowest levels since mid February, down 13.5% on the year, and down 25% from its all time high made in August of 2015. $90 has certainly been an important technical support level since the start of 2015. It was the pivot point for the massive February 2015 earnings gap, the low flash crash panic low in August 2015, the brief bottom in Jan 2016 and then obviously the breach in February 2016.  Here we are again, and I guess the most troubling part this time around is the relative under-performance to the broad market and peers like Time Warner (TWX) and Comcast (CMCSA) and the lack of news causing the weakness:

DIS since 2015 from Bloomberg
DIS since 2015 from Bloomberg

Taking a slightly longer term view, it becomes clear that the stock is clearly broken the uptrend from its 2011 lows, and that $90 level is precarious support at best, with an air-pocket down to $80:

DIS since 2009 from Bloomberg
DIS since 2009 from Bloomberg

Despite fiscal 2016 eps expected to rise 12% this year, and 5% next, shares of DIS trade below a market multiple at 15.5x 2016 and 15x expected fiscal 2017, the first time below a market multiple in 5 years:

from Bloomberg
from Bloomberg

Options traders have their antennas up, with 30 day at the money implied volatility (blue below, the price of options) up sharply in the last few weeks, despite realized volatility (white below, how much the stock is moving) barely inching higher:

From Bloomberg
From Bloomberg

The next identifiable catalyst will be their fiscal Q4 earnings on November 10th. With the stock at $90.50, the Nov 11th weekly 90.50 straddle (the call premium + the put premium) is offered at $4.60, if you bought that you would essentially be buying the implied movement in the stock between now and the day after earnings, or about 5% in either direction. The stock has only move about 2.5% the day following earnings over the last 4 quarters, while its 10 year one day average has been about 3.4%.

We will be sure to take a closer look closer to earnings, but I suspect buying DIS, with an eye towards dollar cost averaging down toward’s $80 may make sense on a gap below current technical support.