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The bounce
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September 24, 2001: 7:46 p.m. ET
Monday's rally may fade, but some shares are dirt cheap: spotlight on Disney
By Michael Sivy
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NEW YORK (Money) - Everyone breathed a sigh of relief on Monday as the stock market ended its worst string of consecutive daily losses since the Great Depression. At the close the Dow was up 368 points, or 4.4 percent. And the percentage gain for the Nasdaq topped 5 percent.
I think the worst is over and that stocks are still oversold. But that doesn't mean that we've seen the final selloff in this bear market. After a major decline, share prices often stage a brief rally known by traders as a dead-cat bounce. (The humor on trading desks tends to a bit sick: The idea is that even a cat will bounce if you drop it from high enough up.)
There are a number of reasons such a bounce occurs. After any sizable drop there are always bargain hunters who rush in. And there was additional buying in this case, because traders had cut back their positions late on Friday so they wouldn't be exposed to bad news over the weekend -- on Monday many of them bought back some of their former positions.
Still, many of the same issues that spooked investors last week are still with us. We could face setbacks in the pursuit of bin Laden and there's always a possibility of at least scattered acts of terrorism. And it's worth remembering that a truly sustainable bull market won't start until everyone who wants to sell has sold. That means we could see stocks rally enough to permit another wave of selling that would send stocks back down one final time.
Long-term fundamentals
On the other hand, all the long-term positives are still in place. Interest rates are down, inflation is tame, both tax cuts and Federal disaster spending will provide economic stimulus. Even though we won't know exactly when a sustainable recovery has begun, prices for many stocks are at very compelling levels. The most recent analysts' recommendations tend to be for defensive stocks, such as Procter & Gamble (PG: Research, Estimates) or for classic economic cyclicals, such as Caterpillar(CAT: Research, Estimates) and Wal-Mart (WMT: Research, Estimates) .
When it comes to depressed shares of companies with great long-term franchises, tech investors have an embarrassment of riches. Since so much of the tech universe is in turmoil, my instinct right now would be to favor stocks that own their markets and are likely to continue to do so. Applied Materials (AMAT: Research, Estimates), IBM (IBM: down $0.35 to $94.45, Research, Estimates) , Intel (INTC: Research, Estimates) and Microsoft (MSFT: Research, Estimates) all meet that standard.
Wish upon a star
If I were going bargain hunting today, however, my first choice would be Disney (DIS: down $0.44 to $17.46, Research, Estimates). The media companies have been getting hammered ever since the economic slump began because they are dependent on advertising. And that exposure has become even greater in the past week as both broadcast and cable television networks provided long stretches of news coverage with few or no commercials.
AOL Time Warner (AOL: Research, Estimates) (owner of this website) is generally regarded as one of the best diversified media companies because it derives a large part of its revenues from subscriptions and monthly charges that are more certain than advertising. But even AOL announced after the close Monday that it would not quite reach targets in the second half of the year.
For Disney, the damage has been far greater. Through its subsidiary ABC, Disney has felt the full force of lost advertising. Even worse, the company derives about half of its operating earnings from theme parks and resorts, which have been badly hurt by the drop off in both domestic travel and tourism from overseas.
On top of the business problems, on Thursday Disney stock was walloped when major shareholders were forced to sell an enormous stake. To pay off margin loans and meet other liquidity needs, the Bass family of Texas dumped 135 million shares (see "Bass sells Disney stake"). Disney bought back 50 million, but the other 85 million landed on the market at a time when it was practically in free fall.
The result is that Disney shares are down to $18, their lowest level in more than five years. The company has an irreplaceable franchise and a very strong balance sheet. Its long-term growth rate is over 12 percent. And by historical standards it's considerably underpriced at a P/E in the low 20s based on this year's estimated earnings. There's no telling how long a rebound will take, of course, but at least you're not just wishing upon a star. 
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