An Attractive Investment in an Overheated Market
Ted is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yahoo! recently interviewed a 16-year old actress-turned-day trader who apparently had a pretty good year in 2012. Among other nuggets, she advised viewers to buy what they like and sell what they don't like.
That a 16-year-old day trader is giving out "investing" advice should come as welcome news to permabulls -- it is a clear sign that we are in the early stages of a stock market bubble. Imagine the riches that were reaped during the tech bubble -- now imagine it happening all over again so that a new generation can learn that you can't ignore fundamentals forever.
Nothing in the market is screaming cheap right now, but overvalued markets tend to stay overvalued a lot longer than any sensible investor would deem appropriate. With that in mind -- and with the knowledge that most investors cannot stand sitting in cash -- I will present the case for Disney (NYSE: DIS), a company with under-appreciated growth prospects.
Disney is perhaps the most beloved media conglomerate in the world. Its animated movies and theme parks are a central part of everyone's childhood. It has an enormous library of hit movie franchises in addition to lucrative television networks. No other media company has created as many blockbusters as Disney, and with the recent acquisition of Lucasfilms and the ongoing creative genius at Pixar, it looks as though the company will continue to churn out instant classics for years to come.
Making movies is typically a risky business and even Disney produces a flop every now and then. But its huge stable of hit movies and associated merchandise helps to stabilize what is normally a volatile business. In addition, its theme parks are valuable assets that help monetize its brands even further. The parks are expected to see a large boost in revenue as the global economy continues to recover.
On the animated film front, only Dreamworks (NASDAQ: DWA) comes close to matching Disney's creative talent and nose for making hit films. But the movie production business is inherently uncompetitive; consumers of content do not decide to see one movie -- the best movie -- at the exclusion of all others. If Dreamworks puts out a good movie and Disney puts out a good movie, then people will buy tickets to see both. In other words, consumers don't choose between one movie or another, they simply go see good films and don't see bad films. This allows all movie producers to thrive as long as they can put out good content.
The competition is a little more fierce in TV broadcasting, but Disney still holds its own. Discovery Communications (NASDAQ: DISCA) -- owner of Discovery Channel, among others -- owns tens of thousands of hours of content that it can replay or re-purpose every now and again to sell advertising at little additional cost. The company has also teamed up with Oprah's OWN network to add compelling programming to the nascent network. However, unlike Disney, Discovery is heavily dependent on advertising revenue -- which tends to rise and fall with the economy. This volatility in revenues makes Discovery a riskier bet than Disney, all else equal.
Scripps (NYSE: SNI) is another niche TV broadcaster. It owns properties like Food Network, HGTV, and Travel Channel. These niche properties can charge more for advertising than a less-targeted audience like Disney's ESPN. Like Discovery, Scripps owns nearly all of the content on its networks, which enables it to re-purpose and replay content a low incremental cost. However, Scripps has had significant trouble expanding outside the U.S., which limits its growth prospects.
I don't invest based on the general market valuation -- I just look for great investments and will buy them regardless of how expensive the market seems to be. However, I have not found any great investments as of late, which is why I am holding a lot of cash at the moment.
But I understand that many investors want to be fully invested all the time; it's hard to sit on the sidelines during a raging bull market. Disney is not screaming cheap, but it has momentum in fundamentals going for it. The stock will probably do about as well as the market over the next decade, but could run up 20% to 25% this year if the bull market continues (and I suspect it will).
So, for investors looking for a few decent picks in this overheated market, you could certainly do worse than Disney.
Ted Cooper III has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation, Scripps Networks Interactive, and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!