Last week's epic rally pole-vaulted the Nasdaq Composite out of a bear market and the Dow Jones Industrial Average out of a correction. A bear market is typically defined as a decline of at least 20% from a high, while a correction is a loss of at least 10%. For now anyway, the Nasdaq Composite and the S&P 500 indexes are out of their bear markets and merely in correction territory.
What's even more impressive is that the Nasdaq Composite is up nearly 25% from its 52-week low set about two months ago in mid-June. The rebound has provided a much-needed reprieve for investors who endured the painful sell-off. But for the same reasons investors shouldn't sell a stock just because it goes down, they also shouldn't buy it just because it goes up.
Instead of worrying if the market will reenter bear territory, it's better to focus on your individual holdings while thinking big picture in the process. One of the most practical ways to do that is by digesting quarterly earnings within the context of a company's longer-term investment thesis. Let's use Walt Disney (NYSE: DIS) as an example of a well-known company that has been particularly affected by the recent bear market.
Disney stock's wild ride
This year has been a good learning experience, especially for new investors. Many name-brand stocks like Disney were down more than 50% from their highs during the worst of the sell-off. It can seem bizarre that a company as established and globally recognized as Disney could see its value cut in half in a little over a year. But it perfectly embodies Wall Street's animal instincts, and how flinch reactions and impulsive trading can lead to volatile movements in a stock's price.
For decades, Disney was seen as a reliable blue-chip dividend stock. In Nov. 2019, it launched Disney+ to compete in the streaming industry. The costly endeavor was meant to provide a new growth segment. Then, the pandemic hit, Disney's parks and movie businesses plummeted, and the company cut its dividend.
But increased demand for at-home entertainment benefited Disney+, and the service grew faster than expected. This year, the parks have nearly recovered to their pre-pandemic levels. However, steep losses at Disney+ and an expensive movie budget called the long-term profitability of the company into question. Throw in inflation and recession fears, and investors were once again confused about how to value Disney's new business model within the context of a weakening economy.
Recent third-quarter fiscal 2022 earnings showed signs of continued growth for Disney+ and the company's other streaming platforms like Hulu and ESPN+. The decision to raise the price of Disney+ in the U.S. from $7.99 per month to $10.99 and offer an ad-supported tier for $7.99 is meant to help limit losses and make the business profitable by fiscal 2024.
The company's pricing power at its parks and its ability to create content that people can't seem to get enough of is a rare advantage in the media space. Disney's integration of its on-screen entertainment, in-person experiences, and merchandise is unrivaled. However, its business has historically slowed during recessions, because consumers reel in discretionary spending when the economy isn't as strong.
In sum, Disney stock didn't deserve to fall from over $200 at its high to just over $90 at the low. But it would also be a mistake to assume the company doesn't have its work cut out for it, both in the short term by navigating inflation and an unsteady economy while proving the long-term profitability of its streaming business and creating content that produces box office hits.
Simplifying a confusing time
Taking Disney's ambitious investment in streaming within the context of the pandemic and the 2022 inflation story makes it easier to understand why the stock price has been all over the place. No one knows if it will retrace its 52-week low or continue surging higher. Just like no one knows if the Nasdaq Composite will fall back into a bear market.
In the case of Disney specifically, instead of speculating if a full-blown recession is on the horizon or not, it would be more useful to focus on the traction it gains from its new ad-supported tier; if existing Disney+ subscribers absorb the 38% price hike; if it can keep raising prices at parks as needed; and if its calendar year 2022 content slate is as profitable as it hopes.
Even if you aren't interested in Disney stock, its three-year journey still provides a great lesson in why it's better to evaluate earnings updates and weave them into your broader investment thesis instead of trying to guess if the stock (and broad market) has bottomed out or where it could be headed in the next few quarters.
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Daniel Foelber has the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $150 calls on Walt Disney. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.