I hope you had a great week! We have been monitoring a number of developments in the markets and shared some of the most interesting ones with our members at the Trading Club. The S&P 500 may have done very little in the past couple of weeks, but there have been some really nice moves in currencies such as the Turkish Lira (of course!) as well as EURUSD and GBPUSD which have played out as we expected going by our Checklist trading process.
You would be wrong to think that it’s boring to be a stock investor at the moment. US President Trump has today enacted trade tariffs which will no doubt lead to volatility in industrial metals and related industries. But beyond the main focus of the headlines, there are some very exciting opportunities in value and growth stocks alike.
Disney is a great example of this. In our recent Trading Club video we analysed the world’s second (after the market value of Netflix jumped this week) largest media company which owns brands including Pixar, Marvel, Star Wars and ESPN, and which Warren Buffet credited as ‘the best performing stock ever’ in a memorable speech a few years ago. Here are a few of the highlights featuring our Company Analysis Checklist that we use to research companies like Disney, as featured in our Million Dollar Traders online course.
First up on our Checklist is the management. We like to look for high efficiency measures such as the Return on Assets (ROA) and Return on Equity (ROE) to quantify the score that we assign to the Checklist. As you can see, Disney looks great on both absolute and relative basis according to these measures. +1
Next up, we need to consider Disney’s products. I’ve already mentioned some of the amazing brands they own, but to quantify this we look to the company’s sales and margins. Disney’s sales were almost $57 BILLION in the past year, and have also grown at an annual rate of 5.45% which is remarkable for a company of this size. I also like to look at margins. Its all well and good growing sales, but if a company has achieved this by cutting prices then it may be unsustainable and will usually show up in the operating margin. In this case, the margins are healthy and in fact showing stable growth of 3.7%. Suffice it to say, the company’s products are indeed relevant and in demand. +1
So far, so good. Financial health is the next factor on our Checklist. We want to know whether the company is profitable and generating cash to fund its operations and reward shareholders over time with dividends and buybacks. As a long term investor, this is one of the most important things I look for. In the case of Disney, who generated $10.7 BILLION (!) in free cash last year, I have no concerns about their financial health. They also have a lower 'gearing ratio’ (basically, a low amount of debt relative to total assets) which means that the company can easily finance itself without relying on outside lending (especially important in a rising rate environment - in contrast to ‘glamour stock’ rival Netflix). +1
Valuation matters dearly. You might have found the greatest company on earth, but if it is trading at a zillion times cash flow or earnings, then you probably shouldn’t be looking to buy it! What we are looking for are great companies with durable businesses trading at reasonable valuations. There are numerous ratios that value investors like to look at, such as Price to Earnings, Price to Book, Price to Cash Flow and EV/EBITDA. In my experience the most significant valuation measure is the Earnings Yield (higher is better), highlighted below at 7.5%. This appears attractive, and offers greater value to the S&P 500 (around 6%, not pictured) as well as Disney’s average valuation over the past 5 years (5%). By just about any measure, Disney looks like a bargain relative to history, and the market - particularly against that $10.7 billion of free cash which is another statistically significant valuation measure and indicator of future returns. +1
Although not a specific item on our Checklist, here’s why that cash flow is so great. Disney has consecutively raised its dividend for years, and has also been distributing its cash pile to shareholders via buybacks. The 'total yield' (dividends + buybacks) that you earn as a shareholder regardless of how the chart moves is currently over 7% - try earning that on an investment grade government bond! Also, the payout ratio (dividends paid relative to free cash) is only about 20% so there are no signs that the company won’t be able to sustain this if it continues with its dividend policy.
Now, Disney is a global brand with customers all around the world. So to keep things brief here, we assign a +1 to our Checklist. In total we arrive at +5, a maximum positive score for Disney which is remarkable for such a well known company and brand.
With more positive news on the horizon regarding the release of an on demand content platform to rival Netflix in the coming months, and a bedrock of durable advantages, I am looking at Disney very closely. The inner technician is also excited by the chart formation which displays a 2-3 year consolidation that looks to be concluding, which given the overwhelmingly positive fundamentals indicated by our Checklist, suggests a new multi year uptrend is imminent. (Of course, none of this is intended as investment advice and you should always make your own trading decisions based on your views and circumstances, and nobody else’s).
And there you have it... This is what the Academy is all about! Its a great feeling to share the process with you that Lex and I use ourselves to analyse stocks as professional investors. There really is no special formula or reason why you cannot come up with ideas like this yourself with access to the resources that we make available in the MDT Course and Trading Club. I owe everything to the market and the opportunities it has given me to grow both personally and professionally, and being able to help and inspire a new generation of traders is what makes this journey all the more worthwhile.
If you want to check out the full analysis on Disney, and also another growth stock that we featured in this hour long special, along with a whole library of recent videos, then I strongly encourage you to head to the Trading Club and become a member today!
Have a great weekend,
James Helliwell | Chief Investment Strategist
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