Barron’s is an interesting publication—widely read, well-respected, and very historical, Barron’s is the kind of publication most hedge funds will have in their reception area for clients to read. It sends a clear message to wealthy non-professional investors: this money manager is serious, and reads widely from sober analysts.
Of course, when it comes to making investment decisions, most analysts and portfolio managers ignore Barron’s. Few will read the magazine at all, and fewer will read it in depth.
Why? Partly this is because of Barron’s focus. The magazine looks most intensely at large-cap value stocks because they are safe and much easier to understand. But to deliver alpha, hedge funds need to dig deeper and look further afield. They need to find small cap stocks that are either significantly overvalued or deeply misunderstood, providing an opportunity to make a bet that the mainstream investor will not understand and cannot be privy to.
This, after all, is why investors hire asset managers in the first place: to find investment opportunities that they can’t find elsewhere.
With that in mind, let’s take a look at Barron’s recent article recommending investors sell Disney (DIS). The sell recommendation is based on the classic belief that Wall Street has priced in all upside; the magazine worries that ESPN still has headwinds and there is a lot of room for film performance to surprise to the downside.
In this, Barron’s is echoing the downgrade from sell-side analysts at BMO Capital, who noted 2017 is an ambitious year for Disney studios and 2016 yields tough comps for the company to play against.
In selling Disney, investors will be letting go of a stock that is 1.6% off its 52-week high but is up 11% over the last year.
It’s also worth noting that Disney’s performance is far less than the market over the past year. The S&P 500 is up 19% over the last year, and Disney was actually down from a year ago for a couple months before Donald Trump’s victory helped it climb just a few percentage points over its previous high over the past year in May.
Disney’s P/E ratios are also far below the market, at around 19 for the last year and 18 looking forward, far below the 26 level for the market as a whole. However, EPS rose 17% last quarter on a year-over-year basis and has been rising for a while.
Now analysts need to step back and ask themselves whether Disney’s current price point prices in all potential upside. When looking at weak fundamentals at ESPN and potential downside from studios, they should also look at whether ratios relating to the firm’s enterprise value price these downsides in. They should also model various hypothetical earnings and revenue results and determine if the company is likely to have strong enough cash flow to maintain its dividend and buy back shares to drive EPS higher.
This is a deeper, more complicated view of Disney. It may uncover a buying opportunity that the post-Barron’s sell off will yield. Alternatively, it may confirm the popular view, encouraging the analyst to accept that the market is right on Disney. Then it’ll be time to find another investment idea.