Disney Skeptics Miss Out on Record Rally During Horrible Year

(Bloomberg) -- With Walt Disney Co.’s theme parks shuttered, its cruise ships docked and the company losing tens of millions of dollars a day, money manager David Sather made a tough call in the second quarter.

He sold all 153,875 of his Disney shares.

“Even with social distancing, we couldn’t see how the parks were going to be doing well,” said Sather, president of the Sather Financial Group in Victoria, Texas. “Not when your profitability is predicated on having massive amounts of humans crammed into your theme parks.”

Yet in one of the more surprising turnabouts in this Covid-19 crazy year, shares of the world’s largest entertainment company have hit new highs -- despite $5.4 billion in losses over the past two quarters. Disney shares are up 20% for 2020 and have more than doubled from lows set in March, when coronavirus fears tanked the market.

Sather wasn’t alone. More than 150 institutional investors have liquidated their entire Disney holdings this year, according to data compiled by Bloomberg, selling a total of 5.38 million shares now valued at close to $1 billion. They ranged from Parnassus Investments, which unloaded 1.86 million shares because of the Covid-19 uncertainties, to smaller investors like Prescient Management Co., which sold 9,000 shares.

For investors still in the stock, the question now is whether the rally will continue. BMO Capital Markets analyst Daniel Salmon lowered his rating on Disney to “market perform” from “outperform” this week, citing the huge runup. “We step to the sidelines,” he wrote, recommending streaming industry leader Netflix Inc. as his top pick instead.

Losses, Debt

Disney’s losses, soaring long-term debt and the suspension of its dividend create a dilemma for investors focused on fundamentals like earnings and return on capital. The share price has risen largely due to the success of its streaming video services, such as Disney+, which launched a year ago in November and now has nearly 87 million global subscribers.

The company needs to keep investing in its streaming business, even if that means losses and no dividend, said Darren Pollock, portfolio manager at Cheviot Value Management Inc. in Beverly Hills, California. He kept his 15,400 Disney shares.

“It’s incumbent on the company to create a strong direct-to-consumer platform to compete with Netflix and others,” Pollock said.

Chuck Carnevale, founder of the stock research firm Fast Graphs Inc., argued in an online post this week that Disney’s valuation of nearly 90 times expected 2021 earnings makes it too expensive.

“They’ve now bid this stock up to a price that’s not only unsustainable, it’s unrealistic based on any prudent, rational forecast for earnings,” he said.

Dividend Focus

The hold-it-or-fold-it decision has been particularly tough on investors focused on dividends. The company was a long-time returner of capital, doling out $2.9 billion in the fiscal year that preceded the pandemic. But like other companies involved in tourism and travel, Disney skipped its 88-cent-a-share July payout and will do so again with the year-end payment, a trend that could continue until business improves.

In May, when Disney first said it would forgo the semi-annual payment, the blog Dividend Growth Investor recommend selling the shares and replacing them with a mix of Comcast Corp., AT&T Inc. and Verizon Communications Inc. Investors would have been better to stick with Disney, which is up 47% since then.

A number of income-oriented stock funds seem to be hanging on, however, including Buffalo Dividend Focus, which had 8,705 shares as of Sept. 30.

“Once the impact of Covid-19 subsides and management has more clarity on the future cash flows of the businesses that were impacted by the pandemic, I expect dividend payments to resume,” said Paul Dlugosch, one of the fund’s portfolio managers.

Sather, the Texas fund manager, replaced Disney with Google parent Alphabet Inc. and Facebook Inc., among other picks. He said those stocks have done well, are far less risky and also stand to benefit from people spending more time online. Still, he’s not totally over Disney.

“I would love to own it again,” he said.

©2020 Bloomberg L.P.