The Force Awakens, Can Energy?

On December 17, “Star Wars: The Force Awakens” opens in theatres nationwide.  The Walt Disney Company bought Lucasfilm Ltd., the creator of the Star Wars franchise in 2012, with high expectations it would produce significant, positive financial returns.  The soon to be released film, the first “Star Wars” movie in 10 years, will feature characters not seen in 32 years and is expected to rival the opening weekend record of $209 million for June’s “Jurassic World”.

 

In addition to the theme parks we know so well, Disney owns a large stable of media and studio entertainment companies that help to diversify the sometimes hit and miss nature of the block buster movie business.  These include among others, ABC Television Network, The Disney Channel, ESPN, Disney Publishing Worldwide, Disney (retail) Store, Walt Disney Studios Motion Pictures, Pixar Animation Studios, and Marvel Studios.

 

Earlier this year, concerns over subscriber losses at ESPN resulted in a drop of just over 10% in Disney’s stock price.  This precipitated a review of the firm’s holdings in Disney and a decision to purchase additional shares for some clients.  The Investment Committee was of the opinion that Disney held long term value and the drop in share price provided an opportunity.  Despite another 10 % dip in conjunction with the broader market 3rd quarter swoon, Disney has shown a 4% increase since early August.

 

On December 2, the company announced a 2015 dividend payout equal to a 19% increase over 2014 and further growth is expected in 2016 amid excitement for the coming “Star Wars” movie.  This might suggest favorable long term performance for holders of Disney stock and owners of ETFs and mutual funds which hold Disney.  Stayed tuned and may the force be with us.

Closing Ranks on Energy

Energy, and more specifically oil, recently traded at a 7 year low.  The International Energy Agency’s December Oil Market Report confirmed slowing demand, slightly higher OPEC output and unabated US shale production added to an already robust global supply.  This continued production, when combined with China’s slowing growth and Europe’s early stage economic stimulus activity, would seem to make any chance of oil and commodity price improvement very unlikely in the near future.

 

However, longer term, the Investment Committee remains bullish on energy but recognizes some companies are better equipped to endure an extended period of low prices and demand.  The decision was recently made to sell TransCanada and National Oilwell Varco and to rely increasingly on more integrated oil companies like Chevron and Exxon. Portfolios are also gaining direct energy exposure while providing greater diversification (and less risk) through the Guggenheim Energy ETF.  Two of our core US stock positions, PowerShares Dynamic Large Cap Value ETF and Schwab US Large Cap Growth ETF also have energy exposure of between 4-10%.

 

Only time and the benefit of hindsight will validate whether these recent changes and a long term commitment to energy will be correct.  History suggests supply and demand will ebb and flow to seek equilibrium.  What always remains uncertain is how long the cycle will take.  Holding positions in more fully integrated energy companies and diversifying through the use of ETFs and mutual funds, seems to be a prudent way to wait while producers and consumers come back in balance.