01/04 Kelly Letter Topics
Weekly market review
Seasonal rally
Abysmal manufacturing
Horrific housing starts
Crumbling consumer conf
Rising oil price
Obama's cabinet
Is the Fed a failure?
Platinum 5-star stocks
Market forecast on track
Oil price trends
When to short Treasuries
We continue holding Disney because we think its mastery of animation makes it very hard for competitors to break into its industry. This is often called a wide moat, as in the river surrounding a castle in old times. The wider the moat, the harder it was for enemies to cross and attack. Disney, with its wide moat of animation skills, deep library of content, and powerful brand, is tough to attack.
Bob Iger became CEO of Disney in 2005. One of his first orders of business was warming up relations with then Pixar CEO Steve Jobs. It worked, and Disney acquired Pixar in 2006 for $7.4 billion. It was well worth it. All the talent of the hottest animation company, including the famed John Lasseter, came to Disney whole hog, not just as part of a distribution sharing scheme. Disney is the undisputed champion of animation again, and Iger has been able to move onto new frontiers.
The primary new frontier is digital content and distribution. The best way to fight piracy is to provide a reasonably priced way for people to get the genuine article legally. That motivation -- along with a superb connection to all things digital via its history with Apple's Steve Jobs -- was what made Disney the first company to take advantage of the iTunes platform. It's also farthest along in making content for direct-to-internet venues, where people can watch short films on their computers or portable devices.
Disney looks to have at least 33% upside from here to around $40 based on my projection of 4% annual growth and 20% margins. That's the baseline story. Add in a little Disney magic and the stock could see $50 before we sell.
The way we'll sell after it passes $40 is with a trailing stop loss order that sneaks up behind the price as it keeps rising. We've used that approach to great effect in the past. We're nowhere near that point yet, however, and are quite content to hold on knowing that the company's doing the right things, and paying a small 1% dividend yield for our patience.
