Credit: Disney.
It's hard to argue that The Walt Disney Company (DIS 1.54%) isn't the most successful entertainment conglomerate of all time. Disney not only owns and operates its namesake parks, resorts, and TV channels, but it's also amassed an incredible supplementary portfolio of brands and businesses, including Pixar, Marvel Entertainment, Lucasfilm, and ABC Family, as well as an 80% ownership stake in ESPN, and 50% of A&E Networks.
But that doesn't mean the market isn't willing to bet against the House of Mouse. As measured by the time it would take for investors to unwind their short positions given the stock's current average daily trading volume, Disney is the most shorted stock in the Dow Jones Industrial Average as of this writing.
In case you're unfamiliar, when you "short" a stock, you're selling shares you don't own with the promise to buy them back -- or "cover" -- at a later date. If the price of that stock falls, you can cover the shares you shorted at a lower price, and then pocket the difference. In essence, to short a stock is to bet the price of its shares will go down.
In Disney's case, with the most recent data showing nearly 42 million shares sold short and worth about $4.5 billion at Disney's current share price, it would take a full 7.5 days for investors shorting Disney stock to fully cover their positions -- that's more time than any other Dow component. It would seem, then, that Wall Street simply doesn't trust that Disney stock can keep climbing. But why?
Answering the multibillion-dollar question
Investors probably aren't shorting Disney stock because of the entertainment behemoth's most recent results. Last fiscal year marked Disney's fourth consecutive year of record financial performance. And more recently, when Disney released fiscal first-quarter 2015 results in February, it said sales climbed 9% year over year to $13.4 billion, handily exceeding revenue expectations of $12.9 billion. Meanwhile, Disney achieved 23% growth in earnings per share to $1.27, again outpacing analysts' estimates for earnings of $1.07 per share. That performance also came on broad strength, as operating incomes climbed in all five of Disney's business segments, including 3% growth to $1.495 billion from Media Networks, 20% from Parks and Resorts to $805 million, 33% from Studio Entertainment to $544 million, 46% in Consumer Products to $626 million, and 36% at Interactive Gaming to $75 million. Disney stock popped more than 7% the following day as a result.
But this also leads me to the most probable reason behind the big short bets against Disney: As it stands, Disney stock currently trades within pennies of the all-time high it set earlier this week. And over the past year, shares of Disney have climbed an impressive 40%, trouncing the broader market and making it the fourth-best performing component of the Dow over the period.
DIS Total Return Price data by YCharts
The impressive performance likely has some investors guessing the stock's impressive streak will pull back soon. But make no mistake: This hardly means Disney stock can't continue climbing from here.
Shorting Disney is a bad idea
If I've learned one thing early in my young career as an investor, it's that winners like Disney tend to keep on winning. So how will Disney do it?
Avengers: Age of Ultron could beat the first Avengers' debut record this weekend. Credit: Disney
First, remember that Disney has an enviable slate of big-budget movie blockbusters on the way, starting with the domestic launch of Marvel's The Avengers: Age of Ultron this weekend. Though Age of Ultron has already racked up over $255 million in gross receipts from early international releases, Fandango says it's responsible for an incredible 95% of this weekend's total ticket sales in the U.S. so far. It should come as no surprise, then, that preliminary estimates show the action-packed sequel exceeding the first Avengers' record-setting $207.4 million weekend debut set almost exactly three years ago.
After that, in June, Disney Pixar will unveil its first film since 2013's Monsters University, with Inside Out. Then comes Marvel's Ant-Man in July, followed by another Pixar movie with The Good Dinosaur in November, and, last but not least, the widely anticipated Star Wars: The Force Awakens to close the year in December.
That's only part of its near-term movie slate, too. Down the road, Disney has scheduled two more Avengers films and has big plans for the Star Wars franchise. Toy Story 4 and Pirates of the Caribbean 5 are coming in 2017, and only last month the company announced plans for a Frozen sequel -- and all of these movies are only part of its overall movie business.
Investors should also remember Disney's brilliant propensity for letting the success of its big-screen properties trickle down to profits not only in your living room through its media networks, but also to its consumer products, to its themed attractions at Parks & Resorts -- in which we already know Disney smartly invests billions of dollars each year to maintain pricing power and record attendance -- and to its interactive gaming division, with the Disney Infinity massive multi-player online game.
And yes, there's some risk in that slower-growing media networks still make up over a third of Disney's operating profit. That's especially evident amid worries that traditional media networks could suffer, as the industry shifts to online streaming and more al la carte channel bundles. But all of the aforementioned supplementary growth should only continue to reduce the outsized influence media networks have on Disney's overall results. And even then, if Disney's lucrative deal with DISH Network's over-the-top Sling TV service is any indication, it should have no problem ensuring that media networks' transition to the future is as profitable as possible.
Finally, remember that Disney regularly aims to return at least 20% of the cash it generates to shareholders in the form of dividends and share repurchases. For investors willing the hold the stock over the long term and let compounding do its work, this approach should only serve to further bolster returns.
In the end, that's why I'm convinced that as long as Disney's entertainment portfolio is so deep, its business so brilliantly organized, and its policies so shareholder friendly, shorting Disney stock is a terrible idea.
