Taking Profits From Netflix And Putting Them To Work In Celgene

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Includes: CELG, NFLX
by: Abba's Aces

Summary

At this point in the stock market I want to swap out of expensively valued stocks into at least fairly valued ones such as the swap I'm mentioning today.

Netflix is a discretionary stock which the consumer can give up at any point in time while Celgene is quite the opposite.

I'm locking in profits for Netflix because it was a great gain and I don't want to be greedy.

I recently closed my position in Netflix, Inc. (NASDAQ:NFLX) from my growth portfolio because I felt that I had a pretty good profit at the time in the portfolio and I wanted to add shares of a biotech growth stock. I moved shares of Celgene Corporation (NASDAQ:CELG) from my relegation league to the growth portfolio after selling Netflix. Celgene Corp is a biopharmaceutical company. It is engaged in the discovery, development and commercialization of therapies designed to treat cancer and immune-inflammatory related diseases. On July 24, 2014, Celgene reported second quarter earnings of $0.90 per share, which beat the analysts' estimates by a penny. In the past year, the company's stock is up 21.78% and is beating the S&P 500 (NYSEARCA:SPY), which has gained 14.17% in the same time frame. I initiated my position in Celgene on January 8, 2014 and am up 5.09% on my position.

I sold my shares in Netflix because I wanted to lock in some profits in the portfolio. Netflix, Inc., provides internet television network. The Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. On July 21, 2014, the company reported second quarter earnings of $1.15 per share, which was in-line with analysts' estimates. In the past year the stock is up 76.4% and is beating the S&P 500, which has gained 14.19% in the same time frame. Let's now take a look at both stocks on a fundamental and financial basis.

Fundamentals

Some investors like to look at the trailing twelve month P/E ratio because it tells them how the stock is valued with respect to earnings which were actually earned. I mainly like to look at the forward year P/E ratio to get an idea if earnings for the coming year are about to increase or decrease. I don't like paying more for a company's future earnings than what I was paying for the previous year because it indicates that the earnings for the coming year are going to be less than the previous year. A reduced future year earnings indicates either a reduction in revenues or major expenses are being incurred.

I also like to look at the 1-year PEG ratio. This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone.

An additional value I like to look at is the earnings per share growth for the coming year. This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above.

Let's take a look at how Netflix and Celgene stack up against each other on a fundamental basis in the table below.

Stock

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

NFLX

459.09

137.86

69.90

6.57

99

1.96

70.33

CELG

89.61

51.79

18.31

4.89

73

1.56

33.18

Click to enlarge

Because both stocks are considered growth stock due to their extremely high earnings growth expectations one would anticipate their earnings valuations to be expensive. As we can see from the table above, both Netflix and Celgene are expensive on trailing earnings (I consider a P/E value above 30 to be expensive). However, on future earnings only Netflix is expensive while I believe Celgene to be fairly valued (I believe fair valuation to be between 15 and 30). But because both stocks have different growth profiles it's important to measure the PEG ratio. By looking at the PEG ratio I believe that both stocks are fairly valued, but with Celgene being a better value with respect to growth rate. Hence on a fundamental basis I believe Celgene to be the better stock.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. In my growth portfolio however I will forego the dividend aspect of the financials. Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment.

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better.

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The higher the ROI value the better.

Let's take a look at how Netflix and Celgene stack up against each other on a fundamental basis in the table below. As we can see from the table, Celgene is definitely the better financial manager of the two as it beats Netflix on all financial metrics I look for in a company.

Stock

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

NFLX

N/A

N/A

3.6

14.5

7.8

CELG

N/A

N/A

10.6

28.1

15.4

Click to enlarge

Wrap Up

I sold Netflix for a 25.32% gain or 35.37% on an annualized basis. Again, I only sold Netflix because it made me a good gain and I wanted to lock up some profits. Netflix is a very excellent company with great near- and long-term earnings growth expectations, but is expensively valued based on 2015 earnings estimates. I'll continue to monitor it and may add it back into the growth portfolio.

Netflix's future growth potential consists of being able to generate more of its proprietary content, sign additional content distribution deals with content makers, and continued expansion around the globe. I don't believe the global economic growth right now is what it's made out to be. I do believe that the consumer may start to tighten its belt and it may actually help Netflix. I believe the people are going to stay away from going to the movies and dinner to stay in and watch Netflix while having a home-cooked meal. It's for these reasons I'm monitoring Netflix and may jump back into it.

Celgene on the other hand is not only a great growth stock, but it is also a fair value stock based on 2015 earnings estimates. I would much rather be in a growth stock which is fairly valued than be in a stock which is expensively valued at the current time. Personally I felt the most recent quarter from Celgene was good, but the stock dropped to the tune of 3.29% the day it reported. Despite that news I'm staying long on this name, even though I'm barely up on it.

Celgene's growth potential is dependent on its ability to come up with innovative drug products to help the unfortunate. The company's top products include Revelimid and Abraxame which treat myeloma and first-line metastatic pancreatic adenocarcinoma, respectively. The company has guided for 2014 sales of the former to be about $4.95 billion, from a previous range of $4.9 billion to $5 billion. Sales of Abraxane were guided to between a range of $850 to $900 million which is unchanged from previous guidance. Ultimately I'd rather be in this defensive stock than a discretionary stock such as Netflix at the current time.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long CELG, SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.