Disney's Big Advance May Be Over For Now
Summary
- Disney's big advance has come as investors have focused on the reopening theme.
- This has pushed Disney's valuation to its highest levels in more than two years.
- That has left an options trader to bet that the ride is over.
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Disney's (NYSE:DIS) stock has skyrocketed in 2021. The company has successfully launched its direct to consumer streaming content, and now investors are turning toward the reopening of the theme parks. But that also has sent its earnings multiple to the highest levels in more than two decades, almost more than double its historical average.
The big run-up and the steep valuation are likely the big reason why an options trader is making a big bet that the stock declines by the middle of May, or at the very least, the stock stops rising. This bearish outlook comes in the face of analysts increasing their earnings outlook for the company next year.
Analysts now estimate the company will earn $4.87 in 2022 and $6.33 in 2023. That is up from estimates of $4.75 and $5.93, respectively, back in December. The rising estimates are likely a reflection of the coronavirus vaccine's rollout and hope that all of Disney's theme parks can once again reopen and people return to movie theaters.
The positive news around the virus has also helped boost revenue estimates higher and back to pre-pandemic levels. It's now expected that the company's revenue will climb to a high of $95.6 billion in 2023.
Betting That The Stock Stops Rising
Still, someone made a rather bearish bet on Disney based on changes in the open interest levels. On March 9, the open interest for the May 21 $200 puts and calls both rose by around 19,000 contracts apiece. The data shows that the $200 puts were bought for about $13.50. Meanwhile, the $200 calls were sold for around $13.40. It means that some are betting that Disney's stock price remains below $200 by the expiration date in the middle of May.
Bearish Patterns Forming
Meanwhile, a bearish technical pattern formed in Disney's chart known as a rising wedge. It would suggest the stock does reverse lower in the weeks ahead. The relative strength index indicates a drop, as it has been trending lower since peaking well above 70 in late 2020. The falling RSI and the rising stock price create a negative pattern called a bearish divergence.
It would suggest that the stock falls back to roughly $182 over the short-term, a drop of roughly 8.3% from its current price on March 9 of $198.50. If the stock should fall below $182, it could result in a much steeper decline sending the share around all the way back to $158.
Clearly, there are reasons to be optimistic over Disney, especially as vaccines continue to be distributed and people once again begin to travel and such. But it would seem like, based on the valuation, much of this good news has already been priced in.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (30)
How will that impact supposed woke stocks? Or is their censorship and boycotts held only for US censorship??
