Despite downturn, Mickey and friends should come out OK

Sure, Disney (NYSE: DIS) shares have fallen by 35 percent since May. And its recent quarterly earnings report was mixed, with earnings up just a little, after adjustments. But lamentations in the media have been overblown.

Disney’s parks and resorts division posted a 7 percent increase in revenue. Operating income did drop 4 percent, but that’s due to higher labor and fuel costs (and fuel has since retreated dramatically).

Not everything is zip-a-dee-doo-dah-riffic. However, where’s the love for the dependable ESPN and Disney Channel cable revenue, which is offsetting lower ad revenue at ABC? Where’s the applause for the popularity of the consumer-product division’s “Hannah Montana” and “High School Musical” merchandise?

These aren’t banner times in the media industry. News Corp. shares were slammed recently after the company lowered its expectations. CBS shares fell, too, even after the company reassured investors that it would keep its beefy dividend. Others, such as Time Warner and Viacom, are relying on steady cable properties, but are also feeling the sting of the fading advertising market.

So hang in there, Mickey. Things aren’t great and won’t get any better in the near term, but shares seem to have been punished more than they deserved. Recession or worse, entertainment still matters.

Ask the Fool

Q. If my stock splits 2-for-1, how do I figure my cost basis? – J.C., Lake City, Fla.

A. It’s probably easier than you think. Your basis splits 2-for-1, along with the stock. Imagine that you bought 100 shares of Buzzy’s Broccoli Beer (ticker: BRRRP) for $50 each, paying a $12 commission. Your cost basis is $5,012 – or $50.12 per share. After the split, you have 200 shares, and your basis is still $5,012, or $25.06 per share. Always add the purchase commission to your cost basis and subtract the sales commission from your proceeds – you’ll save a few tax dollars that way.

If you’re paying a lot more than $12 or $15 per trade in commissions, you might want to find a less expensive brokerage. Learn more about brokerages at www.broker.fool.com and www.sec.gov/answers/ openaccount.htm.

Q. What’s deflation? – P.T., Kenosha, Wis.

A. It’s the opposite of inflation, and it happens when price levels fall over time, typically during a recession. It’s frequently accompanied by rising unemployment and decreased production. So you get the idea – although the idea of lower prices may sound good, deflation isn’t usually welcome. Prices may be lower, but that’s mainly due to supply outstripping demand, as many people (and businesses) can’t afford various items or are putting off buying them.

Experts today are divided on whether the U.S. is facing the threat of deflation, but many agree that there are measures that can be taken to combat it. The Fed, for example, can lower interest rates, as it has recently done. Those worried about deflation might brace for a possible pullback in stocks and might look to lock in some yields with government bonds.

My dumbest investment

I purchased shares of a penny stock and then sold them on my wife’s request. Lesson learned: Let your wife make her own investment decisions. I bought shares at 58 cents and 72 cents each. The current price? $1.44. I’ll probably get back into this company, even though the price is higher. – J.T., online

The Fool responds: The stock is back around 80 cents now, having been as low as 44 cents and as high as $3.77 during the year. This is penny stock territory, where lots of tiny, unproven companies trade. It’s often rather difficult to find sufficient information on them. Worse, they tend to be very volatile and easily manipulated, leading investors to get excited and pile on when a penny stock is rising, and then wiped out when it rapidly falls. Your wife’s advice was sound: Consider steering clear of penny stocks. There are lots of bigger, more established companies trading at attractive prices – especially these days. Try our Motley Fool Stock Advisor newsletter free for 30 days, and you’ll be able to get access to all past issues and lots of recommendations.