Schaeffer's Trading Floor Blog

Weekly Contrarian: Will Disney's Momentum Shake Skeptics Loose?

Wall Street has taken a glass-half-empty approach to outperforming DIS

by 12/13/2012 11:35 AM
Stocks quoted in this article:

TheStreet.com recently featured an article entitled "Disney Made a Horrible Mistake," in which the author points a critical finger toward the exclusive-access agreement between The Walt Disney Company (NYSE:DIS) and Netflix, Inc. (NASDAQ:NFLX). Although projecting the merger should bode well for NFLX, the writer believes the deal could ultimately result in missed opportunities for DIS.

For starters, by not opening up first-run content to competition, DIS may lose out on revenue gained through advertising. Furthermore, the columnist knocks DIS for not following in the successful footsteps of Time Warner Inc. (NYSE:TWX) by creating its own subscription-based service. This would let the company control everything in house, while allowing them to garner additional income by making Internet streaming service subscribers pay for non-exclusive content.

All in all, the author argues, "Why bust the model open prematurely? And then when you have to bust it open, do it on your own, extending your presence as a creator and distributor of content. "

Takeaway

Technically, DIS has charted a steady path higher over the past 52 weeks, with the shares adding around 41% in that time. Although the stock took an earnings-induced stumble in early November, DIS was able to find a formidable foothold atop its 40-week moving average, and has since been propelled higher by this rising trendline.

Despite this solid technical showing, sentiment around the Street remains steeped in skepticism. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio ranks in the pessimistically skewed 64th percentile of its annual range. In other words, puts have been bought to open over calls at an accelerated clip in recent months.

Additionally, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.51 shows that put open interest outstrips call open interest among options expiring within the next three months. This ratio ranks higher than 98% of other such readings taken during the past year, suggesting short-term speculators have rarely been more put-heavy toward DIS.

The uncertainty toward the stock has spilled outside of the options pits as well. Among covering analysts, no fewer than 10 still maintain middling "hold" recommendations toward the equity. Additionally, the consensus 12-month price target of $54.75 represents a lukewarm 10% premium to the security's closing price of $49.64 on Dec. 12. DIS could be positioned for some contrarian tailwinds in the near term, should any of these doubters take after Nomura. The brokerage firm upped its outlook for DIS last Thursday, and the door is wide open for the remaining holdouts to follow suit.


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