A Rare Chance To Buy Disney At A 13% Discount

Amber Hestla's picture

Monday, January 26, 2015 - 10:00am

by Amber Hestla

Sometimes as analysts we're so focused on finding the next "big thing" that we overlook a great opportunity that's sitting right in front of us.

This happened to me recently when I was researching some of my most interesting investment ideas. I've researched and invested in this company plenty of times throughout my career, so I figured I'd focus on some newer companies first.

But at the end of the day, I came back to it once again.

You see, in my premium advisory, Income Trader, I only use my income-generating strategy on stocks that I want to own. I look for companies that I'd have no problem buying if they fell 10% or even 20% in price. Think Microsoft and Coca-Cola, for example.

This approach has worked extremely well. Since I started publishing Income Trader in February 2013, I haven't closed one trade for a loss. It may sound impossible, but over the past two years I've closed 81 straight winners.

So after spending the weekend researching some pretty interesting ideas, I finally got to the company I'd saved for last -- The Walt Disney Company (NYSE: DIS). And boy am I glad that I didn't overlook it, because it was the perfect opportunity.

It sports many of the attributes that Warren Buffett looks for in an investment.

The combined value of its brands alone is a whopping $42 billion -- making it the 14th most valuable in the world. Even better, Disney returns profits to shareholders. Not only has it paid a dividend for 59 consecutive years, the amount it pays has more than tripled since 2009.

Beyond being one of the most well-known brands in the world and consistently returning cash to shareholders, it has a very low amount of debt, sporting a debt-to-equity ratio of just 30%. That's about half as much debt as the average S&P 500 company.

The takeaway: Disney has a strong margin of safety. Any investor should feel comfortable owning it. But more importantly, it is a perfect candidate for my income-generating strategy.

Why Disney is the Perfect Income Trade Right Now...

Currently shares of DIS are trading just below $95. Based on my calculations, a reasonable 12-month price target is $86, which I determined by multiplying Disney's projected long-term earnings growth rate of 15.9 by its 2016 earnings estimate of $5.41 per share.

So the issue arises -- am I getting value buying DIS at its current price, about 10% above its 2016 price target?

I'd argue no, but would I want to buy DIS below its price target of $86? Of course.

That's why instead of buying shares of DIS, I recommended selling put options on the shares in last week's issue of Income Trader.

By using a put-selling strategy with DIS we had the opportunity to either generate up to a 5.1% instant return or buy shares at a 13% discount.

As you may already know, one "put" option gives buyers the right -- but not the obligation -- to sell a 100 shares of stock at a specified price before a specified date (expiration date).

When we sell a put contract, we receive cash, or what I call instant income, upfront.

Selling a put means we're expecting the stock not to fall to a certain price (strike price). If it does, for every contract we sell, we have to buy 100 shares at that price (more on why that's not a bad thing in a minute).

If the stock goes up, or doesn't sink to the strike price we chose, we'll pocket that upfront money as pure profit.

As part of the process your broker will likely require a deposit -- called a margin requirement. It usually runs about 20% of the amount it would cost you to buy the shares.

So let me show you how it worked with this Disney trade.

As I mentioned above, shares of Disney were trading around $94.80. I recommended selling DIS Apr $82.50 Puts for $0.65 - $0.85. Currently the options are trading outside of this range, but that could change. As long as the puts are trading between $0.65 and $0.85 I still recommend executing the trade.

Here's how the trade looks if we sold one DIS put.

Your broker would likely require a margin deposit of $1,650 per contract (20% of $8,250 - the total cost per contract if you were to buy shares of DIS at the strike price).

Now I'm looking for one of two desirable outcomes with this trade.

1) Generate instant income: Selling these puts would generate between $65 and $85 (remember each contract controls 100 shares) of instant income. If shares of DIS trade above the strike price of $82.50 on April 17th (expiration date) then we keep the instant income for a return of 3.9%-5.1% in only 93 days.


2) Buy shares of DIS at a 13% discount: If shares of DIS trade below the $82.50 strike price on April 17th, then we are obligated to buy DIS at $82.50 per share. But adding in the $0.65-$0.85 instant income we received for each share, we'll end up buying shares of DIS between $81.65 and $81.85, a 13% discount to the $94.80 share price when the trade was initiated.

If this happens, you get the opportunity to buy shares of a company you want to own anyway -- just at a much lower price than the market was offering when you sold the put. You'll even know the price upfront before you enter the trade.

Of course, this does not happen often. In my experience, more than 85% of options expire worthless, meaning we don't have to buy shares and the instant income we receive when selling puts is pure profit.

While I probably won't have a perfect record forever, every trade we've closed so far has been a winner. On average, we've generated 7.3% in instant income every 62 days on our money since February 2013 -- an average annualized gain of 43%. If an investor had sold 10 contracts on each trade, they would have pocketed a total of $64,510 in instant income since the service launched almost two years ago.

If potentially doubling or even tripling your income stream sounds appealing to you, for a limited time you gain access to my research at a 67% discount. But this offer will soon be taken off the table. To learn more about my strategy and take advantage of this limited discount, follow this link.

Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.