Three of my investments, however, aren’t like that. There are three stocks in my portfolio that I don’t anticipate selling at any price.

This is because they are the highest-quality businesses I own. So if I sold the shares, I don’t think I’d be able to replace them with an upgrade.

Disney

The first stock I’d never sell is Walt Disney (NYSE:DIS). Both the stock and the business have had a turbulent time over the past few years, but I’ve never been tempted to sell my investment.

Like any investment, Disney stock carries some risk. In my view, the biggest risk comes from the cost of continuing to create new content, which could weigh on investment returns.

I think, however, that Disney’s content library gives it a huge advantage over its competitors that offsets this risk. Furthermore, the strength of the company’s back catalogue is basically impossible for rivals to replicate.

Disney is the only stock in this list that I’m actively buying at the moment. I think that the stock is currently undervalued and I’m looking at increasing my investment in the business.

Realty Income

I also have a substantial investment in Realty Income (NYSE:O) that I don’t ever intend to sell. Instead of selling, I plan to keep reinvesting dividends to increase my passive income.

Realty Income is a real estate investment trust (REIT) that makes money by leasing retail properties. Like other REITs, it distributes its rental income in the form of dividends.

The company is exposed to risk in the form of high property prices, which is making expansion difficult. But it has navigated these challenges well before and I think it will continue to do so.

Twenty-eight years of consecutive dividend increases make the stock a Dividend Aristocrat. It also reinforces my belief that the business can perform well in any economic environment.

Berkshire Hathaway

Lastly, I own shares in Berkshire Hathaway (NYSE:BRK.B). This is another stock that I never anticipate selling.

The risk with this stock is that the size of the underlying business limits growth opportunities. But I think that patience will be rewarded over time.

In my view, Berkshire has a unique advantage. It uses the money it receives from insurance premiums to make investments that power its earnings.

This is a good business model, but it takes a lot of capital to make it work. Underwriting its insurance obligations requires significant cash to cover potential losses.

Berkshire’s big advantage is that it has the cash to operate in this way. Other insurance operations don’t have the same protection.

This allows Berkshire to avoid unnecessary risk and be conservative in its insurance underwriting. I think this advantage is durable and so I’m never selling the stock.

Fundamentals

By my calculations, the increase in the Disney share price takes the company’s enterprise value to around $323bn. In order to invest in more Disney stock, I need to be confident that the company will make enough money to provide me with a satisfactory return on my investment at this price. And as Warren Buffett says, it can’t be close—the answer needs to scream at me, otherwise the stock isn’t a buy for me.

The company divides its operations into two segments. The first is its Parks, Experiences, and Products segment, which includes Disney’s theme parks, cruise lines, and resorts. The second is its Disney Media and Entertainment Distribution segment, which covers things like Disney+, ESPN, and the licensing of the company’s titles. To invest in Disney stock, I’ll need to know how much cash each of these is going to produce.

Parks

The company reported $7.23bn revenue in its Parks segment during the holiday season, compared to $3.5bn in the same quarter a year ago. Operating income also increased from a loss of $119m to a profit of $2.45bn. There’s no doubt in my mind that this is impressive, especially in a quarter featuring theme parks operating at a reduced capacity due to Omicron. 

In order to take a view on whether or not this performance justifies buying Disney stock, I need to assess two things. The first is how quickly Disney’s theme parks will return to full capacity. The second is how much income they will generate when they do. To work out whether or not Disney stock is a buy, I need to know the answers to these questions.

Streaming

Disney added just under 12m new subscribers to its Disney+ service during October, November, and December. This represents an 8.5% increase in subscribers. I think that this is clearly impressive in a quarter where the number of Netflix subscribers increased by around 4%. The company also reported an increase in average revenue per subscriber from $4.12 to $4.41. 

Currently, Disney+ is a loss-making service. Clearly, this is expected to change and the business will start producing income. As with the theme parks, there are two crucial questions for me as an investor. The first is when Disney will optimise its streaming service for profit. The second is how much cash this will produce when it does. Only once I’ve figured this out can I make an investment judgement about Disney stock.

Conclusion

I think that Disney is one of the best businesses in the world and I’m delighted to own the stock in my portfolio. During the pandemic, when the price was much lower, Disney stock screamed out at me as a buy. At current prices, though, it doesn’t. So I’m going to hold onto the shares I have for now and concentrate on my other investment opportunities.

However, it was the read-across from Netflix that weakened the Disney share price. Netflix, the mega-cap streaming service, released its fourth-quarter earnings, which caused the stock to tank by 22%. The primary reason for the fall was the company’s weak new subscriber Q1 forecast of 2.5m. It was much lower than the 5.7m that analysts expected.

This is where Disney comes in. The company is growing its own streaming service called Disney+. So if Netflix is struggling for new subscribers, Disney+ may be too. But is a 7% fall in the Disney share price really warranted based on Netflix’s forecasts? I’m going to take a look to see if this has presented me with a buying opportunity.

The bull case

Disney has a major ingredient I look for in an investment: an economic moat. Essentially, this is a competitive advantage that makes it harder for competitors to take market share. It can also be thought of as a barrier to entry.

Disney’s economic moat comes from its characters and stories it has built over decades. There’s only one Mickey Mouse, after all. And nowadays Disney also owns brands Star Wars, Marvel and Pixar.

Before the pandemic, Disney was also able to generate a double-digit operating margin and return on its equity. These are the kinds of financial metrics I look for when investing. To me, it represents the strength of Disney’s business, derived from its economic moat.

The bear case

Disney’s business was greatly impacted by the pandemic. It generates a significant proportion of its revenue from its theme parks, which were shut down during lockdowns. The company said its wider Parks, Experiences and Products division suffered $3.5bn in lost operating income due to the closures in one quarter alone. A new strain of Covid cannot be ruled out completely, so this remains a key risk for Disney’s business.

The company is also still in recovery from the pandemic. Net income is forecast to be $5.9bn for fiscal 2022 (the 12 months to 2 October 2022). In fiscal 2019 (so pre-Covid), net income was a much higher $11bn. Analysts are attributing the lower profit guidance to a contraction of margins due to inflation and increased operating costs.

This brings me to the current valuation. Disney’s share price has fallen by 21% over one year. However, the stock is still valued on a forward price-to-earnings (P/E) ratio of 34. Before the March 2020 Covid-related stock market crash, Disney was trading on a P/E of 20. Therefore, the stock still looks richly valued, even after the share price decline.

Should I buy at this Disney share price?

I do think Disney is a quality company with a strong economic moat. It’s a stock I’ve owned before, and would buy again, depending on the balance of risk-to-reward.

However today, I think there’s further downside risk in the share price. The valuation still looks rich, and profits aren’t expected to reach pre-pandemic levels until at least fiscal 2024. I’m keeping it high on my watchlist for now.

Does the stock’s resurgence over recent weeks mean it’s now far too cheap and that there’s money to be made? Possibly. That said, there’s another company I’d be far more interested in buying right now.

Cineworld shares: Mission Impossible?

To be fair, Cineworld’s last update was actually better than I expected. Attendances had “steadily grown” over the six months to the end of 2021, no doubt boosted by the release of the long-awaited No Time to Die. The latest Spider-Man movie has also helped to improve revenue, allowing the company to generate positive cash flow again. 

The forthcoming slate of movies should build on this momentum. The new Batman film, releasing in March, Jurassic Park: Dominion, out in June, and Mission: Impossible 7, debuting in September, should be nailed-on blockbusters. The removal of Plan B restrictions in the UK, including the requirement to wear face masks, could/should prove another shot in the arm for Cineworld shares. 

But let’s be sensible. When it comes down to it, the odds of this business thriving again aren’t great. Even if Cineworld is successful in its appeal against the legal case it recently lost against Cineplex, the sheer amount of debt on the company’s books is a huge reason to steer clear.

The fact that it’s still the most heavily shorted stock on the entire UK stock market is another. Now throw in the competition it faces from streaming services. Speaking of which… 

Taking the Mickey 

If I were to buy a recovery play in the entertainment space right now, it would be US giant Disney (NYSE: DIS). Priced at a just over $200 a pop last March, the stock now changes hands for under $150. 

Reasons for this weakness include a slowing of growth at its streaming platform. Last November, Disney+ announced it had added 2.1 million subscribers in Q4 of its financial year. That’s down sharply from the 12.6 million in the previous three months.

But should investors really be surprised? Having (unintentionally) timed the launch of Disney+ perfectly to coincide with Covid-19 lockdowns, it was surely inevitable that things would slow.

Yes, a few poorly-received recent Marvel and Star Wars shows may be another factor. However, we can’t deny just how lucrative this intellectual property is and, importantly, will remain. Pixar is another jewel.

For me however, its the theme parks that make Disney a buy. If the pandemic really is to end in 2022, visitor numbers should begin to rise again as international travel bounces back. Sure, a bet on Cineworld could be more lucrative in the event of a short ‘squeeze’. However, I suspect the ride with Disney stock will be considerably less hair-raising.

High-risk stock

In sum, I’d much rather add Mickey and Co to my portfolio when markets reopen on Monday. As nice as it would have been to capture the recent jump on Cineworld shares, I’m still aiming my barge pole at the company.

This is a binary bet as I see it and the prospects for long-term investors, as opposed to nimble traders, aren’t great. 

Full-year numbers — including an update on its precarious financial position — will arrive in mid-March. 

But the share price crashed last week from a high of $179 to below $160. That’s an over 10% plunge in value.

Let’s take a look at what caused the shares to crash, and if I should buy on this weakness.

Quarterly results

It was the release of Disney’s fourth-quarter earnings results on Wednesday evening that caused the share price to fall. And the results weren’t great.

In fact, the results missed analysts’ estimates across the board. Revenue came in at $18.5bn, missing expectations of $18.8bn according to Refinitiv. And earnings per share (EPS) were 37 cents, considerably missing what had been expected to be EPS of 51 cents.

Content sales and licensing proved to be a drag on operating performance, leading to a loss of $65m during the quarter. The pandemic is still impacting the business as production delays have limited Disney’s film content.

It wasn’t all bad though. Disney’s theme parks were all open again during the fiscal fourth quarter, and its cruise ship began sailing. Attendance has rebounded recently too, after the disruption caused by the pandemic. However, a total cost of $1bn was incurred over the full year to meet government safety standards across its parks.

But it’s the streaming service, Disney+, that’s making headlines.

Disney vs. Netflix

It’s a case of streaming wars right now, and there are some big players battling for subscriptions. Disney has a rich history of film content and popular characters, so it’s easy to see why the company launched a streaming service. Netflix, though, has a big head start, and has been building its own content empire.

Unfortunately for Disney, new subscriptions in the fourth quarter came in at 2.1m. This was a big miss on estimates of 10.2m, according to FactSet data. What’s worse is that Netflix added more than double this number of subscribers in roughly the same period.

As it stands there are 214m global subscribers for Netflix, 118m subscribers for Disney+. Netflix is winning the streaming wars, for now.

Final thoughts

I have no doubt that this is an excellent business. It’s catalogue of characters includes traditional Disney films, Marvel and Pixar. This content is the envy of most other competitors.

But the company has had a really difficult time due to the pandemic. Its parks were shut down, and international travel restrictions are prolonging a return to normal attendance levels. Its film studios are still suffering from Covid-related disruptions too.

Revenue for the full year ending October 2021 was $67.6bn, and still under the revenue generated in the 12 months prior to Covid of $69.6bn. The shares are currently valued on a price-to-earnings ratio of 37 for next year, which to me says that a full recovery is already priced in.

I’m going to keep Disney on my watchlist for now. 

The house of mouse

Disney is the second largest entertainment company in the world with its fingers in a great many pies. The company’s revenue comes from parks and resorts, media networks, studio entertainment and consumer products. Of course, its 12 gigantic parks, including Walt Disney World and Disneyland Paris, have fallen foul of the pandemic. This sector made only $16.5bn in revenue in 2020, down $10bn from a year before. Overall, the company lost almost $3bn in 2020, down from a profit of $11.05bn in 2019. 

Expansion and acquisition

Disney suffered a setback from the pandemic, but the bigger picture is encouraging. In 2009, the company acquired Marvel and spawned the Marvel Cinematic Universe. The franchise has grossed over $18bn in box office sales alone, with Black Widow being the most recent release. In 2012, it acquired LucasFilm and the rights to the Star Wars universe. In 2019, it expanded its portfolio by buying 21st Century Fox. It owns ESPN, reaching a sporting audience that its other content could never reach. In 2019, eight of the top 10 film releases were from a Disney company. 

The power of Disney+

Box office takings represent only a small fraction of Disney’s revenue streams. In the case of Star Wars, Disney made just over $5bn in total revenue from its five film releases between 2015 and 2019. However, it sold over $12bn worth of consumer products like toys and jewellery, with further revenue from park visits where consumers were drawn to the Star Wars experience. Disney+ was launched during the pandemic, when most people were under lockdown in their homes. The service rapidly grew to 50m subscribers in six months, a milestone that took Netflix seven years. As the pandemic ends, many of these millions of people should be making their way into Disney parks and toy stores, though this isn’t guaranteed.

Black Widow, baby

I believe releasing Black Widow on Disney+ is a game-changer that’s sending shockwaves through the entertainment industry. On opening weekend, the film made $6om on the streaming service by selling ‘tickets’ at $30 each. Some $159m came in from worldwide box office revenue.

Disney typically retains 40% of cinema ticket sales, but keeps all the money it makes from streaming. This means that the $60m from Disney+ is worth just $9m less than the $159m box office revenue. Disney+ has exposed new customers who love its convenience — it’s cheaper to pay $30 and watch at home than to get a babysitter.

With new streaming revenue, and all operations springing back into action, Disney could make a solid addition to my portfolio at $175 per share. On the other hand, its share price was only $86 in March last year, and another shock could see it fall closer to this level. There’s also significant negative publicity coming from its former child stars, such as Britney Spears, that represents another possible risk.

As good as this performance is for those who had the courage to invest, I’m more likely to buy a related stock from the US market. Before revealing its identity, I’ll briefly recap on why I’m not tempted by Cineworld. 

Cineworld share price: too much too soon?

First and foremost, the company remains heavily indebted and dependent on fresh liquidity to keep going. It’s somewhat inevitable that many traders are betting the Cineworld share price will fall in the months ahead. 

Second, the movie schedule continues to be impacted by the pandemic. Since studios need to be confident that they can make a decent return on their money, I wouldn’t be shocked if more delays were announced.

Third, there’s no guarantee moviegoers will rush back when cinemas reopen. This may be due to an ongoing psychological wound left by coronavirus or the simple desire to be outdoors when good weather arrives.

To be fair, Cineworld has some plus points too. Consumers are craving a return to much-loved activities and it could benefit even more from people being unable to go on holiday for much of 2021.  

As an investor, however, I need to be sure that my money goes into high-quality, multiple-product companies more likely to survive the coronavirus storm. This brings me to a far less risky alternative in the entertainment space.  

This US stock looks like a better bet

At £333bn, US behemoth Disney (NYSE: DIS) towers above Cineworld in size. But it’s not just its sheer market clout that makes this a more defensive pick. Disney owns some of the biggest brands/franchises going, including Star Wars and Marvel as well as companies such as Pixar. It has theme parks, cruise liners and exposure to sports via ESPN. It earns stacks of cash from merchandising every year. 

I’d say Cineworld needs Disney a whole lot more than Disney needs Cineworld. The US giant can easily distribute its own films and TV shows via its streaming service. Boosted by people being forced to stay indoors due to lockdowns, it now has 95 million subscribers to Disney+. It expects up to 260 million by 2024.

No sure thing

Naturally, there are still challenges ahead. Disneyland and co remain closed due to the coronavirus. Even once they are permitted to open, restrictions on the number of visitors are possible. If not, social distancing measures look inevitable, which doesn’t exactly sit well with the ‘magical’ atmosphere it wants to create. In addition to this, departures of its cruise ships remain suspended. Naturally, Disney will also continue to face stiff competition for eyeballs from the likes of Netflix and Amazon.

Having recently hit a record high, one might reasonably argue that a lot of optimism is already in Disney’s share price too. A twist in the coronavirus tale could put paid to that. Due to the size difference, the Cineworld share price is theoretically more likely to double in value in the near future than Disney.

In spite of all this, I know which I’d feel more comfortable owning within my Stocks and Shares ISA. While Cineworld is on life support, the Mouse is in rude health. 

A UK stock with a niche product

British manufacturing company Avon Rubber has contracts with US and international governments. Along with defence products for the military, it makes respiratory aids for the emergency services. These have been in high demand during the pandemic.

The Avon Rubber share price is up 13% in a year and 312% in the past five years. It’s been declining since November when it suffered a setback. It was due to deliver an order to the US Army that was unfortunately delayed, which will affect this year’s profit margin. Today its price-to-earnings ratio has fallen to a cheap looking 7. Avon offers a dividend yield of 0.9% and earnings per share are £4.47. It has earnings growth and a strong balance sheet, having sold its milk division last year.

The order delays are for a business that appeared to be poised to thrive. However, it’s still winning orders. And given the geopolitical conflict in the world, I doubt demand for Avon Rubber’s products will dry up. If the company can get back to delivering its high-quality products on time, then I believe its share price will recover too. I’d be happy to add Avon Rubber to my portfolio for a minimum five- to ten-year period.

A long established investment

I’m truly amazed by how well Walt Disney Company did in 2020, considering the pandemic closed all its parks and destroyed its hospitality business. But the launch of its streaming network Disney+ outperformed even the most bullish of expectations. Disney’s back catalogue is enormous and has something for everyone from toddler to OAP. This gives it a powerful advantage over competitors. And its established reputation gives it plenty of access to the capital necessary to keep churning out hit series and films.

Disney+ is expanding into new markets across Eastern Europe, South Korea, and Hong Kong, among others. But it’s not just Disney+ that brings home the bacon. Disney also owns streaming services ESPN+ and Hulu, which are both big earners for the company.

With a fall in revenues from its parks and cruises, Disney has cut jobs and begun a reorganisation strategy. It’s also rolling out another streaming service with content from many of its other successful assets, such as ABC Studios.

The downside to investing in Disney is that its share price has already made a phenomenal rebound since the March 2020 market crash. Its P/E is now 74, which indicates an expensive stock. Also, Disney bought Twenty-First Century Fox in a $71bn acquisition. This is an enormous debt burden for the company to carry when times are tough. I think the next year or two could continue to pose some challenges to the group. Nevertheless, I think it’s got great long-term potential, and I’d be happy to own shares of Disney in my Stocks and Shares ISA.

Others say its product is just waiting to be disrupted by changing consumer trends charged by technology. Here, I disagree. The product is the reason why I like this company. As for net debt, this has so vexed shareholders that I think its shares have a whiff of a bargain about them.

I refer to Cineworld (LSE: CINE). The downside has been well explained elsewhere. I think that analysts and other critics of the stock are making the mistake of not seeing the company from the point of view of the consumer.

It recently emerged that Cineworld was the most shorted stock. Bear in mind that finance costs make up a high proportion of operating profit and you can see why.

Then there is Netflix, Amazon Prime, Disney, heck even Apple is investing big money into a streaming channel – so why would anyone want to go to the cinema, right?

This negative narrative is wrong, and part of the clue as to why this is so, sits in that list above: the word ‘Disney’.

TV streaming and the cinema are often complementary. Disney illustrates this point perfectly: big blockbuster movie releases put the sugar on the popcorn that is its business. Disney uses the extraordinarily high profile that the cinema has earned for some of its franchises to create a series of other products, such as content for its premium subscription service and theme parks. Cinema is fundamental to this and it is fundamental because the psychology of going to the movies is different from the psychology of watching a boxset on your TV or smartphone.

Cineworld’s revenue has been hit by timing in movie releases. Actually, despite Avengers Endgame being the biggest box office hit ever, 2019 has been a disappointing year so far. 2020 and 2021 promise to be bigger — with releases lined up including the next James Bond movie, a new Batman flick, and most promising of all, Avatar 2 — with the original Avatar, the second biggest box office hit to date (but bigger than the recent Avengers movie after factoring in inflation).

Cineworld is interesting, not only because of its impressive number of screens in the UK, US and Eastern Europe, but because it is constantly experimenting with technology to create more thrilling viewing experiences and because products such as its Unlimited Card are proving popular.

Sure, a trip to the cinema has become expensive, but compare the cost to a night at the pub. Cinema’s success depends almost entirely on the allure of the movies it shows. I don’t think this is fully reflected in the share price, nor is the potential lift it could gain from the movies scheduled for release next year and the year after. Given this and the fact that the share price has fallen by around a third since April, I think Cineworld could be a buying opportunity, especially If you like the odd contrarian investment.

However, any concern over the game’s cost was quickly muted upon its release. In its first three days, Grand Theft Auto V collected $1 billion in sales. That total, according to the game’s publisher, Take Two Interactive (NASDAQ: TTWO.US), was the quickest any entertainment property has ever hit a billion in sales. 

The enormous cost and sales of Grand Theft Auto V begs an interesting question: How does the business of video games stack up against the movie industry?

Not quite as expensive as you’d think

When news of Grand Theft Auto V‘s $265 million budget broke, several sites were quick to report its budget would rank second all time in production costs if it were a movie. Currently, the most expensive movie production of all-time was Disney‘s (NYSE: DIS.US) Pirates of the Caribbean: At World’s End, which cost roughly $300 million to produce.

Yet, such a comparison isn’t quite apples to apples. Movie production budgets don’t include marketing the film. The rough rule of thumb in the movie industry is that a marketing budget is equal to 50% of the film’s production budget. So, Pirates of the Caribbean: At World’s End total production and marketing costs is likely closer to about $450 million. 

When considering both production and marketing costs, Grand Theft Auto V’s $265 million budget would rank about the same as Evan Almighty, which is roughly the 42nd most-expensive movie ever made. Bottom line, Grand Theft Auto V was expensive, but video games still aren’t approaching the total cost of the world’s most expensive movies. 

But, what about the sales?

From a sales perspective, Grand Theft Auto V has no peer in terms of speed to $1 billion in sales. Whether or not it has peers in terms of its lifetime sales will be another question. 

The highest-grossing film of all time, Avatar, took 17 days to hit the billion milestone. However, Avatar also wound up hitting $2.8 billion across the global box office. That total also doesn’t include home video sales, merchandising, and later revenue selling the film’s rights to broadcasters. 

Although much fanfare around movies focuses on their opening weekend box office, the total amount a movie can generate on its opening weekend is limited by a very finite obstacle: there are only so many seats for moviegoers to sit in. With video games, the only real restricting factor is distributing discs of the game. In a world where Apple can ship 9 million iPhones on an opening weekend, shipping 15 millions discs isn’t much of a constraint. So, major video game events, like Grand Theft Auto and Call of Duty, tend to be more front-loaded in terms of sales. 

What about the middle men?

One other area to watch is how much distributors of different forms of entertainment get to keep. Conventional wisdom is that movie box office hauls are split 50/50 between distributors and the theaters that play the film. However, bigger-budget movies have enough leverage that the scale has been tilted toward distributors.

Overall, for major films in America, only about 30% of gross goes to theaters. When movies are newer, the distributor keeps more of the box office. In later weeks, the theater increases its percentage of the gate. The interesting wrinkle here is that box-office sales are moving overseas (73% of Avatar’s box office came from overseas), and the equation changes in different countries. For example, in China (where Avatar made $182 million), foreign distributors currently get to keep only about 25% of ticket sales. 

In video games, the middle men are retailers instead of theaters, which keep roughly 20% of sales. In addition, Microsoft and Sony keep a console owner fee that’s around 10% of game sales. Add it up, and the cut from various middle men in the movie and video-game business is surprisingly similar. 

Overall, only 17 movies have attained box office totals of a billion dollars. Of those, only three have gone over $1.5 billion, with The Avengers in third place at $1.51 billion. It’s highly likely that, by the end of its run, Grand Theft Auto V would beat that box office total and be the equivalent of the third highest-grossing movie of all time. 

Apples and oranges 

At the end of the day, video games are more of the “upstart” form of entertainment compared to television, movies, and music. As such, its fun to compare them against other forms of media. However, as we’ve seen here, making direct comparisons across various forms of media can prove very difficult, due to the unique economics of each field. For example, while the recent Pirates of the Caribbean stalled at the box office, the series still has huge merchandising tie-ins, and even feeds into rides at Disneyland. Such benefits are either unknown, or very hard to measure. 

Still, the initial sales numbers out of Grand Theft Auto V are extremely impressive. With Call of Duty: Ghosts set to hit on Nov. 15, its records might be short-lived.