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Tuesday, July 25, 2006

Widely Held Stocks: The Shorts Chase Disney (DIS)

Short seller and stock analysts are after Disney. Short interest in the company rose 8.9 million shares in July to 48.7 million shares. Then Cowen & Co. downgraded that stock from "outperform" to "neutral".

What is wrong in Disney Land? It seems that once Eisner was chased out the door that new management has things rolling forward.

Maybe not. Disney trades near its 52-week high in a very weak market. Shares are changing hands at $29.50 against an annual high of just over $31. The logic for Disney's downgrades may be a bit perverse. Since its "Pirates of the Caribbean" film is doing so well in 2006, the results may be hard to match in 2007. Of course, the third installment of the pirate movie comes out next year, which takes the wind out of the sales for that argument.

The new CEO seems to be doing the right thing at the studio. Many jobs have been cut and the production budget of $450 million per year will be spread over few movies.

Disney has also been a leader in digital distribution of its content both on the iPod and the internet. The chances are that this will supplement old-line distribution revenue from sources like DVDs, TV networks and movie theaters.

Disney is at a five year high, and that is what bothers Wall Street. But, the company's forward P/E of 18 is not much higher than the P/E for the S&P 500.

The bet against management is a bet against the company being able to improve on $8 billion quarters and bettering $1.2 billion in operating income.

Its a bad bet, and the shorts may get themselves squeezed.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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