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The Worst Mistake Disney Investors Can Make Right Now

By Anders Bylund – May 8, 2020 at 8:35AM

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The House of Mouse will survive the coronavirus crisis and get back to shareholder-friendly growth on the other side.

The COVID-19 pandemic has not been kind to Walt Disney (DIS 0.19%). The House of Mouse had to close all of its theme parks, the cruise ships are anchored and empty, and silver screens are dark in theaters around the world. The second-quarter report that was posted this week was a mixed bag, Disney's dividend policy has been paused, and even the company's credit rating has taken a hit.

That's a lot of pain, all at once. Disney is certainly in for a bumpy ride in the months and quarters ahead, and the coronavirus crisis will change the company's business model forever in many subtle ways.

But the worst thing you can do as a Disney investor is to throw in the towel, hit the "sell" button with an oversized rubber mallet, and ride off into the sunset to the tune of "Into the Unknown." Disney's end credits are not coming up next, and it would be a crying shame to cash in your shares at today's low prices, only to watch it crush the market for decades to come.

Fireworks behind Disney World's Cinderella Castle with a statue of Walt Disney and Mickey Mouse in the foreground.

Image source: Walt Disney.

What makes Disney tick?

Try to name another company that can match Disney's incredible portfolio of characters, storylines, and fictional worlds. I'll wait. There simply isn't a match for this valuable business asset, nowhere on the planet. Nearly all of the company's operations are ultimately based on this unique moat, with the exception of live sports and other TV-oriented content under the umbrellas of ESPN and ABC.

As long as that fundamental piece of Disney's business soul remains, the company will survive any challenge this crazy world might pose. The details might change. Disney may have to shift its focus away from theme parks and movie theaters, allowing newfangled alternatives such as the Disney+ streaming service to take over.

That's already happening in some small ways, actually. Disney accelerated the release windows for several movies as the coronavirus shut down theaters, giving Disney+ early access to several silver-screen titles. Artemis Fowl will skip the theater circuit altogether, making its premiere directly on Disney+ in June. The service is off to a running start, boasting 54.5 million subscribers this week after launching less than six months ago.

And if Disney+ isn't the final answer to the company's coronavirus problems, I trust the management team to make difficult decisions and steer the business in whatever direction it needs to go next. In the meantime, Disney is reducing its variable costs and pausing its dividend payouts, while the balance sheet holds $14.4 billion in cash equivalents and another $17.3 billion in untapped credit facilities. It would take a lot to topple this house of cash, especially since Disney managed to produce positive cash flows even in the difficult second quarter.

Long story short, Disney will make it through this difficult period and get right back to cash-generating business when the COVID-19 health crisis is gone. Things may be different at that point, but Disney will change along with the times -- and often lead the charge into whatever new innovations we'll see next.

A young boy opening a treasure chest, staring down into the glow of light emanating from it.

Image source: Getty Images.

The upshot: You should be buying Disney stock today

Meanwhile, Disney's stock has fallen 32% below November's all-time highs. Sure, the company is riding down a rocky road full of short-term potholes, but it's still a fantastic investment in the long term.

"In the short run, the market is a voting machine but in the long run, it is a weighing machine," as master investor Benjamin Graham once wrote. Even great companies will see their stocks take crazy turns from time to time but the true value of a fantastic business will settle the market value in the end. Disney is navigating through some troubled waters in 2020 but this, too, shall pass. Smart investors will hold on to their Disney shares and real geniuses are going to pick up some more shares at deeply discounted prices.

And whatever else you do, this is a terrible time to sell Disney shares. Just don't.

Anders Bylund owns shares of Walt Disney. The Motley Fool owns shares of and recommends Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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