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Star Wars: Disney’s Stock Awakens
by D.R. Barton, Jr.
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In high school, I was an in-between guy. Without belonging exclusively to any one group in particular, I identified with a bunch of different people and groups. I played basketball and baseball but didn’t hang out too much with the “jock” crowd. I was a percussionist but didn’t eat lunch with the band crowd. I was a straight A student but never fit in with the Dungeons and Dragons nerd crowd (you know, the folks that dress up as their favorite character for movie openings), so I wasn’t a guy that saw the original Star Wars the day it came out…
I must admit that watching the original Star Wars in the venerable Radford Theater is one of the few things that I remember vividly from my sophomore year. The special effects and the whole experience of George Lucas’ newly created worlds were real memory makers.
Some things don’t change — I won’t be seeing “Star Wars: The Force Awakens” this Friday either. But, after record-setting ticket pre-sales, it seems like I may be one of only a few people not seeing the movie this weekend! I’ll probably catch it next week on our only local IMAX screen.
Let’s look at the new trilogy in the Star Wars phenomenon from a financial perspective and take a deeper peek inside another empire — The Walt Disney Company.
Star Wars 7, 8 & 9 — Yeah, They’re Going to be Big.
First a few notes on the new Star Wars. Morgan Stanley put out an estimate on what the new Star Wars movie might do at the box office and over the life of the upcoming trilogy. Back in June, research pointed to a potential $2 billion global box office take for The Force Awakens. That would make it the third biggest movie ever behind Avatar ($2.7 billion) and Titanic ($2.1 billion). I haven’t seen an update on the box office estimate since the summer but given the record-breaking presales ($50MM in the U.S. and growing), it’s not a stretch to think that it will pass Titanic.
In addition to the box office take, Morgan Stanley made an estimate of the value of the whole trilogy with the Disney marketing machine behind the franchise. Including box office, merchandising and other licensing revenue, the analysts came up with a total of $25 billion. That makes the $4 billion that Disney paid to Lucasfilm for the rights look like a pretty good investment...
In a live segment on Monday this week, CNBC interviewed me about the movie launch and Disney stock. When they asked about the biggest risk that Disney faces trying to hit their gaudy numbers, I answered without hesitation, “China.” And, for a change, I wasn’t talking about the overall slowdown in China’s economy. Rather, the Chinese lack relative familiarity with the original Star Wars releases — and the reason behind that is easy to understand. China had just emerged from the decade long Cultural Revolution only one year prior to the first Star Wars release. While it may be hard for us here in the west to believe, the original trilogy still remains largely unknown in China. Worse yet (and to horror of Star Wars purists), Patrick Brzeski of The Hollywood Reporter relates that the second Star Wars trilogy (released from 1999 to 2005) has a much wider following in China than the original!
All of this rolls up to make the prospects for the new Star Wars “vexingly murky” in China according to Brzeski. And China is key to the total revenue question since that country now generates the second largest box office revenue for movie makers - trailing only the U.S. By current projections, China will overtake the U.S. within the next three years — right in the middle of the current Star Wars trilogy’s rollout. So, China will be hugely important in terms of ticket and merchandise sales for the Star Wars franchise. A lapse there could dampen the financial results for Disney and its myriad partners.
Let’s take a quick look at those partners and see which ones are likely to benefit from the new Star Wars’ rollout.
Following the Money: What Companies Will Benefit from the New Star Wars Trilogy?
Let’s start in the merchandising world. In addition to Disney itself (which I’ll cover in the next section), there are two additional players in the merchandising arena — and one is the clear winner:
- Mattel — Much of the hope for recovery in this struggling toy company is pinned on revitalization initiatives of a new CEO and president combo. Mattel landed a Star Wars licensing package — but only for cars and vehicles through its Hot Wheels brand. Hot Wheels and Matchbox toy cars make up more than 10% of the company’s total sales but it seems this will not be enough to really move the needle for this stock that is down 50% over the last 30 months. On the other hand...
- Hasbro — Toymaker Hasbro has landed the lion’s share of marketing rights for Star Wars toys, games, action figures and the like. All of those toys that you have seen being bought by Star Wars Geeks in so many news stories (and in a hilarious Saturday Night parody) were Hasbro products. Their $225 million licensing deal looks like it will pay real dividends for a stock that has already had a great run. Hasbro’s price chart has almost the mirror image of Mattel — more than doubling over the last 30 months!
In the gaming world, clearly Electronic Arts (EA) will be the big beneficiary of the Star Wars re-launch. While Lego and others will also have video games featuring the Star Wars brand, EA’s newest first person shooter release Battlefront has already seen phenomenal success in the pre-launch. In fact, it’s been so good that EA upped its unit sales estimates from 10 million (the estimate EA made in June) to 16 million units expected to be moved by March, 2016. EA is another stock that has already been on a tear for years.
And Now for Disney.
I must say, I admire how well they’ve played the marketing angles on this new Star Wars release. They’ve hit a great balance of mystery, slow reveal and now, along with their licensees just ahead of the film opening on Friday, they are finishing with a carpet bombing campaign and generating huge buzz.
How will this strong marketing execution translate into Disney’s bottom line? While film-makers are notoriously tight-lipped about profits from films, some smart analysts are already predicting $1 billion in Disney profits from this first film alone. With all the current hubbub surrounding the Star Wars launch, however, it’s easy to forget that movies are only the third biggest source of income for Disney! Cable operations (led by cash cow ESPN) and theme park operations both outpace the movie business. We’ll talk more about those other operations in a future article.
With Hanukkah having drawn to a close, I hope all those who celebrated the Eight Nights of Light had a delightful time. To those gearing up to celebrate the birth of Jesus — Merry Christmas! And to all others, may the peace, joy of love of this season be with you and your families.
I’d love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com. Until next week…
About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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"Can't Miss" Trades
by Kevin J. Davey
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Almost all of my trading is mechanical — 100% based on rules I have tested and found to be valid. I tend to ignore news of the day, fundamental information and adverse “big picture” scenarios because these do not impact my systems greatly. Sometimes, these factors affect my results in the short term, but over the long term, the systems have a positive expectancy.
For traders out there who aren’t 100% mechanical, however, keeping abreast of the current trading trends can pay you well. Here’s an example from the middle of this year.
Back around July, the return on my account for the year (algorithmic trend following, primarily) was around +12%. Nothing to sneeze at, but still not spectacular so I started asking around — who was doing really well in 2015? I soon got my answer: put option sellers on the S&P mini contracts.
Apparently for the previous twelve months or so, ES put option sellers had been raking in the bucks. I had done a little of this myself so I knew the returns were there. Applying this strategy with some leverage though was producing super returns with small drawdowns. It seemed too good to be true and consequently I looked closely at some trading forums. Sure enough, a lot of “newbies” seemed to be in the same trade — selling ES put options. I found so much of this that I sent an e-mail warning (below) on July 10th to a CTA and an 8 figure trader I know:
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I followed it up with a second e-mail later that day:
I had seen the writing on the wall but did not know when or how the “dumb money” would get hammered — I just felt strongly that it would. We all know what happened at the end of August: my very fuzzy, non-specific “prediction” came true (like Nostradamus’ predictions — kind of slippery, but I digress). Even though I knew something bad was coming, I followed my rules and lost some money on my short options trades.
You might think, “Well, the late August decline was a black swan type event that never happens.” Unfortunately, however, black swans happen more often than you think. Back in January, the Swiss National Bank removed the Swiss Franc peg with the Euro currency. For years, the peg had offered a “sure thing” trade — that is as long as the SNB defended the peg. The surprise announcement in January that they were dropping the peg wiped out many small traders (or worse) and a few Forex brokerages.
So, what is the lesson here?
For 100% systematic traders like myself, there is not a lot you or I can do about avoiding black swan scenarios. I do not overrule my strategies and I rigidly adhere to the rules — which I believe is one of the keys to my long term success. So sometimes a black swan (like August) flies into my head — that happens.
For partly mechanical or purely discretionary traders, there is a valuable lesson: beware of trades and situations that people treat like a sure thing — you need to be ready to jump off the merry go round before it stops. All good things come to an end eventually — or suddenly.
About the Author: Kevin J. Davey is a professional trader and a top-performing systems developer. He is the author of “Building Winning Algorithmic Trading Systems — A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading” (Wiley, 2014), recently awarded “Trading Book Of The Year” by TraderPlanet.com. An aerospace engineer and MBA by background, Davey has been an independent trader for over 25 years. He can be reached at his website: www.kjtradingsystems.com
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In the six minute video below, Ken analyzes several trades from the relatively quiet session on Monday, October 12. He opens with a swing trade that started last week on XIV talking about the entry, initial stop, target, and progress of the trade so far. That swing trade offers the opportunity trade XIV intraday with some confidence in the long bias. Ken provides two tradeable intraday scenarios for the XIV move during the Monday session and the position sizing ramifications for each. Ken then discusses a second trade where one of the traders in the chat room went short USO and earned a couple of R for the effort.
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December 16, 2015 #764
Van's Top-Twelve Favorite Trading Books
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