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☕ It might finally be time to buy Disney

Oct 22, 2024

Good morning!

The markets are down as “rising yields impact sentiment” trumpeted CNBC earlier today.

Only that’s not true.

Rising yields mean that the cost of money is going up for big traders who are otherwise leveraged up to their eyeballs. So, they’re keeping things down to a dull roar – meaning buying less – while they wait for rates to come down a skosh.

This is an important concept for two reasons:

You hear me constantly remind you to think like a shark, not a minnow. Understanding how rates impact leverage – not sentiment like the anchors keep talking about – will help you understand what’s really going on behind the scenes.
This additional knowledge will help make you a dramatically more effective and consistent investor or trader because you’ll know which way the wind is blowing and why.

Here’s an example.

Let's say a trader with $1,000,000 in their margin account at the Big Bucks Hedge Fund sees a promising opportunity in XYZ, which is currently trading at $10 per share. The trader wants to maximize potential returns, so he or she decides to use 10:1 leverage. This means controlling a position worth 10 times the amount of their margin, or $10,000,000 in this case.

With $10,000,000 to invest, the trader purchases 1,000,000 shares of XYZ at $10 per share. The total value of the position is $10,000,000.

Now, imagine that the trader's prediction was correct, and XYZ’s stock price increases to $12 per share. The trader decides to close out the position and call it a day.

The position is now worth 1,000,000 shares x $12 per share = $12,000,000.

The profit is $12,000,000 - $10,000,000 = $2,000,000.

Without leverage, the trader would have only been able to purchase $1,000,000 / $10 per share = 100,000 shares of Company XYZ, resulting in a profit of $200,000. Using leverage, the trader increased their profit 10-fold to $2,000,000.

The US 10-YR yield is your give away… if it’s rising on the day, traders will likely be selling to get under risk limits or at least slowing their buying. If it’s falling, they’ll be buying stocks using OPM (other people’s money) to juice their returns.

Either way, YOU have an opportunity... that's the cool part.

Sentiment, which is what you’re hearing on the news, has little or nothing to do with it.

Now you know. 😀

Here’s my playbook.

1 – It’s official, drug stocks don’t have a prayer

Walmart will start delivering prescriptions in six states and plans to expand to 49 by January 2025 (Read)

Drug store stocks like Walgreens, CVS, and Rite Aid don’t have a prayer.

Neither do investors who own ‘em.

The real battle is Walmart vs. Amazon (and something we’ve been talking about for years).

Invest accordingly!

2 – It might finally be time to buy Disney

Disney announced yesterday that James Gorman, who has been Morgan Stanley’s CEO for 14 years, will replace Mark Parker as chairman – starting in January. (Read)

Good!

Gorman knows a thing or two about performance.

Morgan Stanley +350% in a decade
Disney +21.49% in a decade

CEO Bob Iger will apparently retire (again) in December 2026.

I’ve avoided the House of Mouse for quite some time for a variety of reasons but am thinking this could be a one-two punch.

Gorman gets busy learning the brand while finding an ideal replacement for Iger.
Iger gets busy planning a transition.

At issue – and what’s unknown yet – is: 1) will consumers continue to balk at outrageous theme park expenses, 2) can Disney rebuild brand loyalty, and 3) can they do anything even remotely interesting with one of the biggest brand portfolios on the planet, particularly with video and cinema?

Disney is still banging around $100 a share and the 52-week high is just $123.74.

It was nearly $200 just a few years back.

Hmmm. 🤔

Keith’s Investing Tip: Investing is a series of tradeoffs. Take this instance for example, Disney could recover but even if it does, newer highs are just a double. Disney stands to gain very little from AI, is on the wrong end of the stick when it comes to consumers and has tremendous margin pressure. On the other hand, a company like Nvidia stands in front of one of the biggest investable themes in recorded human history and will benefit from trillions of dollars flowing its way no matter who wins the election, what the Fed does next, or what consumers think. Just sayin’. 🤷

3 – GM beats, raises forecast

I mentioned last Wednesday that company estimates coming into this earnings season are so low that it sets up a “slam dunk” for the simple reason that many will find it easier to “beat.” (Read)

General Motors did just this:

EPS: $2.96 adjusted vs. $2.43 expected
Revenue: $48.76 billion vs. $44.59 billion expected
Raised guidance

The stock is up $3.64 or 7.44% as I type.

This just screams short/avoid to my way of thinking.

Putskies, too.

AI and a certain mercurial CEO are a far better long-term choice imho. And, not for nothing, the Chinese are coming with sales prices that are less than ½ of GM’s production cost. 🤦

4 – Peloton’s last gasp

Peloton has apparently partnered with Costco to sell Bike+ in an effort to reach young, wealthy customers. (Read)

Have they seen the sample lines?!

42% of Americans are clinically obese and another 9% are morbidly obese.

Granted I am no picture-perfect example of health, so this isn’t a dig but, rather, more like a statement of the obvious and a headscratcher.

I know which stock I’d rather own and Peloton ain’t it.

Novo Nordisk which makes Ozempic, +358% over the past 5 years
Costco, +220% over the same time frame
Peloton, -74.42% since IPO

Frankly, I am astounded that Peloton still exists.

MyPOV: We live at a time in human history when people have opted for convenience, when our food supply is quite literally killing us because of all the additives and, when many want desert first and dinner in a pill. Fitness is a choice no matter how we define it and no matter what our abilities. Strong mind + strong body = strong results.

5 – BRICs and frenemies

Russia is pushing to create a new world order as it hosts what is being billed as a dramatically upgraded “BRICs and friends” conference. (Read)

Mark my words… there is nothing “friendly” about it.

Putin and Xi want to redefine the world in their image while neutering the West.

This means new life for defense stocks, unfortunately. But also raises serious questions about the US Dollar’s long-term viability.

Longer term, the play here is threefold.

First, China will ultimately succeed in positioning the Chinese Yuan as a viable USD alternative if it is partially asset backed (a possibility I raised more than a decade ago after a particularly hair-raising meeting in Shanghai).

Second, Bitcoin will get taken to the cleaners by the Chinese Yuan which is increasingly being digitized and already in use in China. My guess, as an aside, is that George Soros is already positioning for this outcome given his history. That’s all but incomprehensible for the cryptoratti which lends even more fuel to the fire imho.

And third, digital clearing will replace current clearing mechanisms and, in doing so, become the sole pathway between USD-based trading and increasingly Yuan-based trading.

My favorite bank and the one working most intently to address the challenges I’ve just described has returned nearly 60% over the past 12 months while the S&P 500 has tacked on just under 40%. Same for my favorite defense stocks. If you’ve got this covered, fabulous. If you don’t and would like help, I’m here.