William Henry Keeler was a Hall of Fame baseball player whose career spanned the late 19th and early 20th century. His lifetime batting average was .341. To the degree he’s remembered today, it’s because of his motto, “Keep your eye on the ball and hit ’em where they ain’t.”

I think this saying has particular relevance for today’s stock market.

–I’ve begun to see advertisements for “AI-assisted” short-term trading advice. I’ve never been a fan of day trading. It’s virtue, if that’s the right word, is that it’s easy to do (extrapolating from the past few days’ price/volume action to what will happen today). That’s also the bad news–algorithms can do this better than humans and, unless the AI services systematically subtract value, the competition has just gotten stiffer. So there’s lots of “they” in this arena.

There may be stocks that you’ve followed for years and know the rhythms of its trading well enough to have an edge. That’s fine. But for myself anyway, it’s much better to take a longer view, where the competition is less intense–and the chances of having insights others don’t have are much, much greater.

–IT and Communication Services, the two tech sectors in the US stock market, comprise about 40% of the market cap of the S&P 500. The other 60% is, by and large, tied to the economic fortunes of the US, Europe and China–all areas with aging populations, only faint GDP growth pulses and significant right-wing, deeply anti-growth politics that lower the odds of stronger GDP advances.

At first blush, concept says to favor the first group, because of much stronger secular growth trends. But I don’t think macroeconomics is the most important stock market story today. For example, Consumer Discretionary, one of my favorite sectors, may be a net neutral. But for every Bed, Bath and Beyond that dies of old age, there’s someone else who’s a beneficiary. Remote work is bad for big-city office properties, but a boon not only for their suburbs but also for more distant areas that haven’t had much going on for decades. If we look at the best ytd performers in the S&P, they include the cruise lines, GE (!?!), Chipotle and Align, a dental equipment company.

I think the ex-tech area is a great place to look, because I believe professionals are by-and-large focused on trying to get their tech strategy right. If we were pros, easier to have one or two tech bets, use an index to get the overall tech weighting to the market (thereby neutralizing it–you won’t gain relative performance, but you won’t lose it, either–and look for bargains elsewhere. That’s what I’m doing.

Hulu

Hulu started in 2008 as a streaming collaboration between News Corp (owner of Fox) and NBC Universal. DIS acquired an interest in 2009; Time Warner bought during 2016. ATT then acquired Time Warner, selling the ATT stake to DIS. DIS bought Fox Studios, gaining the News Corp interest in Hulu, as well. Comcast bought NBC.

As a result of this wheeling and dealing, the current state of play is: DIS owns 2/3 of Hulu, Comcast 1/3.

In addition, DIS and Comcast have an agreement, under which DIS can become a 100% owner of Hulu in one of two ways. Starting on 1/1/24, DIS can call the Comcast stake away from Comcast; on the same date, Comcast gains the right to put the stake to DIS (i.e., compel DIS to buy it). The price depends on an evaluation of fair value at the time either option is exercised–subject, however, to a minimum total valuation for Hulu of $27.5 billion.

Since Comcast has already announced its intention to shift all its content that’s now on Hulu to its proprietary service, Peacock, as soon as contractually possible, it seems to me likely it will also put its Hulu shares to DIS as soon as it can. This would mean that DIS needs to come up with $9 billion+ to pay for Hulu in six months or so. That’s roughly 3x trailing 12 months’ profits and would add about a quarter to the company’s total debt ($38 billion; $48 billion minus the $10 billion DIS has in cash), assuming DIS borrowed the entire amount.

DIS

This is not ideal, as I see it, but not a tragedy, either. Several reasons:

–DIS’s operations are generating about $1 billion a quarter in cash flow

–any loss from acquiring 100% of Hulu was made when the deal to buy out the minority was struck. What we’re seeing now is recognition, not a new loss

–the DeSantis shoot-yourself-in-the-foot attack on Disney World has made it plain to DIS that it can’t count on the Florida park being its growth engine for the coming years. So it makes sense not to add to its assets in the Sunshine State until it becomes clear that it’s safe to do.

Nothing else about DIS appears particularly growthy at the moment, so Bob Iger’s recently announced $5 billion cost-cutting campaign makes a lot of sense as well. And the threat posed by DeSantis and the Florida legislature likely means that a good portion of the responsibility for job losses will fall on them instead on DIS management. In an odd sense, then, DeSantis et al are doing DIS a favor: concentrating minds, forcing difficult decisions and taking blame. They may also be ensuring that a disproportionately large part of the resulting pain will fall on the state of Florida.

I just updated my Keeping Score page for June and 2Q23.