Motley Fool: Disney for the long run

It’s easy to understand why investors would be wary of Walt Disney (NYSE: DIS) right now. The company shut down Disney World and Disneyland because of the COVID-19 pandemic, and with millions staying home now, sales will be depressed this year.

But Disney is a good bet to rebound eventually, as it’s consistently posted profits over the years, and they’ve increased as well. From a profit of $7.5 billion in fiscal 2014, Disney’s profit rose 47% to $11.1 billion in 2019. Over five years, that’s an average annual growth rate of 8% – impressive for a company with a market value recently near $190 billion. It also has produced positive free cash flow in each of the past 10 years, which will help it absorb a financial hit this year.

When the coronavirus crisis is over, movie theaters and Disney properties worldwide will be open for business again, but the company has more going on than just those businesses. It owns ABC and the majority of Hulu, for example, and recently launched its Disney+ streaming business, which quickly collected more than 50 million subscribers.

Disney’s stock was recently 31% below its 52-week high, and now could be a good time to buy, if you’re willing to wait for the global economy to recover. The stock offers a dividend, too, that recently yielded almost 1.7%. (The Motley Fool has recommended and owns shares of Disney.)

Ask the Fool

Q: How can a $20 stock be more overvalued than a $100 stock? – G.H., Houston

A: You need to look beyond the price to the underlying value. After all, a $150,000 Rolls Royce could be considered more of a bargain than a $75,000 Volkswagen. To get an idea of how under- or overvalued a stock is, compare its price to other measures, such as its earnings, sales or cash flow.

For example, imagine Mulder Inc. and Scully Co. – each with a share price of $48. If Mulder’s earnings per share (EPS) over the past 12 months are $3, then its price-to-earnings (P/E) ratio (price divided by EPS) is 16. If Scully’s EPS is $2, its P/E ratio is higher, at 24. You’d have to pay $16 for each dollar of Mulder’s earnings and $24 for each dollar of Scully’s earnings, suggesting that Mulder stock is more of a bargain.

You need to look at more numbers than that, though. For example, assess each company’s cash and debt levels, and whether its revenue, earnings and profit margins are growing – and at what rates. Sometimes the company with a higher valuation can still be the better buy if it has more competitive advantages and growth potential.

Q: What does it mean if an investor is “long” or “short”? – T.K., online

A: If an investor is “long” on a stock, it means they have bought shares, expecting their value to rise. (This is what most stock investors do.)

“Shorting” shares is a strange but legal process, in which investors sell shares they don’t currently own, but have agreed to buy later. Those who are “short” are betting that the price of shares will drop, and that they will profit that way.

My dumbest investment

My dumbest investing blunder in the stock market was not understanding the fees and returns on my first investment. I paid a $6.95 trading commission to buy two shares for $15 each. So for a $30 investment, I paid roughly $7 – nearly a quarter of the value of the shares. It was only later that I realized that I’d have to earn a roughly 30% return just to break even. I still hold those two shares as a reminder. – B.S., online

The Fool responds: That’s a great lesson to learn, and many investors never really do. It’s becoming less of an issue these days, as a host of major brokerages have recently reduced their commissions to $0 per trade, but some people might still be paying a commission.

If you are paying, it’s best to aim to have that commission represent no more than 2% of the overall value of your trade. So if you’re being charged $7 per trade, try to place trades valued at least at $350. (This was even more important when brokerages were charging $25 or even $150 or more per trade.)

It’s also critical to be aware of fees in the rest of your financial life, because if you don’t avoid the ones you can and minimize the others, you’ll surrender a lot of money.

Study those bank statements, for example, and see what you’re being charged.