I can’t resist a half-off sale, and I have learned that being greedy does not work on Wall Street. That is why I covered my short and went long. It is funny how just a month ago, everybody could not get enough Netflix (NFLX) at $300, but won’t touch it with a 10-foot pole now that it’s half that price. I loved the company at that point, but hated the stock. Now that love for the company’s fundamentals has turned to indifference, but my loathing for the stock price has reversed, to infatuation.Wall Street loves to go the momentum route by buying high, and then attempting to sell higher, but I like to do just the opposite, by buying unloved stocks and then selling them or shorting them when they become too loved. How else are you supposed to buy low and sell high?
Why it is a bargain: The stock’s implosion makes it now susceptible to a buyout offer and ratchets down its expectations to more reasonable levels. The stock’s downside potential is now dwarfed by its upside possibilities by nearly a two to one ratio. Shorts will be leaving in droves as they cover to book profits and forego opening new bearish positions (bears don’t like shorting attractive valuations) now that the shares are obviously not as overvalued as they once were. At the end of the day, the conclusion that the stock is way oversold is a no brainer. It has simply come down too fast in too short of a timeframe, making it hard for bargain hunters to resist.
Bottom line: In the midst of a nearly a 2% Nasdaq decline today, NFLX shares are bucking the trend, by tacking on almost 5% (obviously splitting the news regarding splitting streaming and DVDs is helping). NFLX’s high relative strength should be a clue that good things are still in the future. Speculators should enjoy a quick run back to the $175 vicinity, while long term players should hold out for better days ahead.
Disclosure: I am long NFLX.
Source: Netflix: From A Bear To A Bull
