Analysis of Disney's Call Spread and Companies Reporting Earnings
In this analysis, we will delve into Berkshire Hathaway's recent report, explore noteworthy companies reporting earnings in the upcoming week, and examine a curious call spread in Disney ahead of its earnings announcement.
Berkshire Hathaway reported operating earnings of $10.76 billion, along with a record-breaking $157 billion in cash. While this demonstrates the success and strong cash flow of Warren Buffett's businesses, it also raises questions about their preference for short-term treasury yields over stocks.
As we navigate through earnings season, it is important to consider the allocation of cash. While some may opt for short-term treasuries, most investors are primarily invested in stocks and real estate, similar to Berkshire Hathaway's approach.
Looking ahead, the options market suggests that companies reporting earnings this week could experience significant movements of 5% or more. While we own certain highlighted names in our event-driven long-only strategy, chasing others may prove challenging due to their substantial gains this year.
For instance, Celsius, a rapidly growing beverage company, has seen a year-to-date increase of nearly 68% and is trading at a high multiple. Hubspot, with a year-over-year growth in the mid 25-27%, is also trading at 10 times revenues, making it relatively expensive. On the other hand, MGM Resorts, trading at 16.5 times full-year EPS estimates and up 13.8% year-to-date, appears to be within reach.
Considering our options market sentiment analysis score, which falls in the 75th percentile for risk-adjusted expected returns, we are cautious about selling existing holdings to acquire new positions. Similarly, chasing Uber, which has surged over 90% year-to-date, presents its own challenges.
However, it is worth noting that we own Warner Bros Discovery (WBD), which has experienced a 26% decline from its January high. Our analysis suggests that earnings might serve as a catalyst for a potential turnaround, especially considering our favorable basis of less than $10 per share.
Now, let's turn our attention to Disney. Trading at just over 17 times, Disney's stock is priced below the market multiple. Despite ongoing adjustments in the streaming landscape, the company's parks have performed well, and ESPN remains a highly valuable media property.
Interestingly, an institutional options trader seems to believe that Disney's earnings could trigger an upward move in the stock. Notably, substantial purchases of the November $95/$100 call spread were observed, including a single trade of 5,562 contracts. This call spread involves buying the $95 call and selling the $100 call.
With Disney currently trading around $85 per share, this trader is betting that the stock could surge well over 10% post-earnings, a level not seen since their August 2022 earnings release. While personally, lower strikes and more time to expiration would be preferred for a higher probability of profit, such changes would reduce the potential payout in the event of a significant rally beyond the $95 strike.
Impact of Earnings Reports and Call Spreads on New Business Ventures
In the world of finance and investment, the recent report from Berkshire Hathaway and the intriguing call spread in Disney ahead of its earnings announcement provide valuable insights for new businesses.
Lessons from Berkshire Hathaway's Report
Berkshire Hathaway's report, which showcased operating earnings of $10.76 billion and a record-breaking $157 billion in cash, highlights the success of Warren Buffett's businesses. This success, however, raises questions about the preference for short-term treasury yields over stocks. For new businesses, this raises a crucial question about cash allocation. Should they follow Berkshire Hathaway's approach and primarily invest in stocks and real estate, or should they consider short-term treasuries?
Market Movements and Business Strategy
The options market suggests that companies reporting earnings this week could experience significant movements. This presents both opportunities and challenges for new businesses. For instance, while some companies like Celsius and Hubspot have seen substantial gains this year, others like MGM Resorts seem within reach. This underscores the need for new businesses to carefully analyze market trends and adjust their strategies accordingly.
Call Spreads and Business Decisions
The curious call spread in Disney ahead of its earnings announcement offers another interesting perspective for new businesses. An institutional options trader is betting that Disney's stock could surge well over 10% post-earnings. This bold move serves as a reminder for new businesses about the potential risks and rewards of making big bets. It also emphasizes the importance of timing and strategic decision-making in business operations.
In summary, the recent developments in Berkshire Hathaway and Disney provide valuable lessons for new businesses. Understanding market dynamics, making strategic decisions, and managing risks are key takeaways for new ventures navigating the business landscape.