The Dow Jones Industrial Average is flat on the year but that doesn’t mean there haven’t been some big winners. The following three stocks—Disney, Intel, and Microsoft—have all generated double digit returns, and they are trading at or near multiyear highs. Clearly this means that investors are confident in their futures. This is a result of their recent strong performances. But is this sustainable? After all there are a lot of global economic headwinds from geopolitical tensions to tepid economic growth and record low interest rates in countries throughout the world.
Let’s take a look at each of them to see if they have more room to run or if you should take profits.
The Walt Disney Company is up over 14 percent for the year. The company is hitting on all cylinders as it has released blockbuster movies while its ESPN franchise continues to thrive. Last quarter the company’s earnings per share grew by 27 percent, which is a huge jump for a mega-cap company. Furthermore investors expect this to continue—they have a $92/share price tag on the stock, which gives it another 6 percent upside.
But is this enough to justify owning the stock now? While Disney is a great company that owns fabulous brands that generate significant revenue streams for shareholders investors my want to reconsider taking a position in Disney shares. Investors are so enthusiastic because they expect the current trends to continue, but we have to keep in mind that a lot of Disney’s profit growth is coming from one-time blockbuster films. If the company experiences a couple of duds, we can really see this take a toll on earnings. Furthermore, one of the company’s biggest businesses is its theme park business. This business generates enormous revenues but it is a relatively low margin business, and if we see a recession this business can actually lose money. These points make Disney especially vulnerable to the downside, making the 6 percent upside potential seem small by comparison. I would stay away for now.