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As a contributor to the New Low Observer (http://www.newlowobserver.com/about-this-site), we intend to give new insights on a low risk approach to trading in dividend paying stocks for tax deferred accounts. The New Low Observer (http://www.newlowobserver.com/about-this-site) is not intended for... More
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  • The Seemingly Random Nature of our Investment Strategy 8 comments
    Apr 17, 2012 2:00 PM | about stocks: AAPL, TRH, WSC, ILMN, Y, NFLX

    We're value investors who are willing to forego the obvious run-up in a stock to acquire quality companies at severe discounts. Our use of Edson's Gould Speed Resistance Lines [SRL] is just one of many tools that help the New Low Observer team refine our technique of buying stocks at or near an all-time low. This approach allows us to put fundamentals into perspective.

    As an example, take our review of Netflix (NASDAQ:NFLX). On December 3, 2010 we applied Edson Gould's Speed Resistance Lines [SRL] to Netflix (NFLX). At the time, the most recent high of the stock was $205.90. The downside targets that we arrived at were:

    • $117.76 (conservative downside target)
    • $68.63 (extreme downside target)

    (click to enlarge)

    NFLX subsequently rose as high as $298.73 on July 13, 2011. However, when the decline in NFLX did arrive, the stock fell to the $117 level and traded in a range for about a month before declining to the extreme downside target of $68.63.

    In our Seeking Alpha review of the Nasdaq 100 Watch List Summary section dated September 26, 2011 (found here: http://seekingalpha.com/article/295933-top-5-nasdaq-100-stocks-near-a-new-low) we said the following of Netflix:

    "Netflix (NFLX) is going through significant turmoil as reflected in the stock price. Since the high of $298.73, NFLX has plummeted to $129.36 or down -56%. The financials on NFLX are a moving target, making it difficult to fully determine the company's true value. However, the business model is compelling and warrants considerable review. NFLX has a market cap of $6.8 billion and enterprise value of $6.65 billion. After applying Edson Gould's 1/3 speed resistance line, NFLX will become worth considering at $99.58 and below. A detailed analysis of Gould's speed resistance line applied to NFLX can be found here (http://www.newlowobserver.com/2011/09/netflix-and-speed-resistance-lines/) ." Subsequently, we were able to acquire NFLX at $63.

    In the same Nasdaq 100 Watch List Summary section dated September 26, 2011, we said the following of Illumina (NASDAQ:ILMN):

    "The following are companies we are tracking from our watch list this week. First up is Illumina (ILMN) which was last on our watch list on December 19, 2009. After being on our list, Illumina rose 172% at its peak on July 4, 2011. Already ILMN has lost -45.17% since the high in July. While ILMN is still nearly 50% above the December 19, 2009, price, the possibility exists that all the gains that were made could disappear in short order. As an example, anyone who bought ILMN after June 4, 2010, is confronted with a loss. ILMN has a market cap of $5.18B. Levered free cash flow at $146.48 million and enterprise value at $4.75 billion. The stock has lost -47.52% since the high on July 6th and is currently trading at 4.65% above its 52-week low."

    Soon thereafter, ILMN declined another -39%. We were able to acquire ILMN at $27.16. Today, ILMN is trading at $44.97 and is in negotiations to be acquired by Roche.

    The proper use of Edson Gould's SRL is to project downside targets of stocks that you're interested in and buy when and if the targets are achieved. Because the market has so many opportunities going on at the same time, missing the rise in Apple (aapl) pales in comparison to our holdings of Transatlantic holdings (NYSE:TRH), recommended on August 28, 2010 at $48.52 (found here: http://seekingalpha.com/article/222720-transatlantic-holdings-a-value-proposition-worth-consideration) getting a bid from Warren Buffett and ultimately getting purchased by Alleghany (NYSE:Y) or Wesco Financial (NYSEMKT:WSC) getting bought by Warren Buffett only days after our recommendation (found here: http://seekingalpha.com/article/222098-wesco-financial-fundamentals-and-technicals-are-aligned).

    We have been able to acquire far more companies that ultimately get bought out by larger rivals, in a relatively short period of time, using our approach that what may seem unfamiliar to you is quite common to us.

    This is a response to our article titled: Considering the Downside Prospects For Apple (http://seekingalpha.com/article/503161-considering-the-downside-prospects-for-apple)

    Regards.

    Stocks: AAPL, TRH, WSC, ILMN, Y, NFLX
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Comments (8)
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  • Carousel
    , contributor
    Comments (309) | Send Message
     
    so, you missed out on a 45% gain in netflix in order to take a 35% gain, and you missed out on 172% in ILMN to get a 39% gain. i think you're doing it wrong. but hey, that's just my opinion.
    17 Apr 2012, 02:19 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2123) | Send Message
     
    Author’s reply » Greetings Carousel,

     

    If you didn't already own any of the stocks mentioned and you wanted to purchase them, you have to start somewhere. Buying high and selling low isn't something that we're interested in, nor is it something that we're going to recommend (whenever possible).

     

    Our work is for people who might have missed the boat and are wondering when to buy AAPL. If you're not one of them then this article was clearly not for you.

     

    Simply because you don't understand what you're seeing isn't our fault. We're providing a constructive approach to answering a question that some investors have. Your hate, while vehement, isn't constructive to the work that we've presented. Thank you.

     

    Regards.
    17 Apr 2012, 02:28 PM Reply Like
  • paco46
    , contributor
    Comments (52) | Send Message
     
    Hello NLO.
    Very interesting article. After today's NFLX run do you believe that the company is still poised to go higher? Any entry point you recommend?
    Any guidance you see for the upcoming earnings date?
    Thank You
    17 Apr 2012, 03:42 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2123) | Send Message
     
    Author’s reply » Greetings Paco46,

     

    It appears that the minimum Dow Theory downside target of $95.12 has been met by falling to $87.47 in AH trading today.

     

    Psychology of the market suggests that the investors, who were spooked by the declined from $300 level, will be worried enough to bring the stock down below the $84 level in the next trading session.

     

    From a technical standpoint, based on the blowout of the $92 support level, this stock is going to the 52-week low unless proven otherwise. If NFLX is a stock that you're still interested in, then your opportunity may have just arrived...again.

     

    Regards.
    23 Apr 2012, 04:44 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2123) | Send Message
     
    Author’s reply » Greetings Paco46,

     

    Since our last remark on NFLX, on April 23, 2012, the stock has met all of our downside targets at $95.12 and $84.20. With NFLX trading at $75.85, we believe that the $62.36 level is a foregone conclusion.

     

    However, if NFLX breaches $62.36, the next downside targets are as follows:

     

    $55.75
    $49.13
    $33.54

     

    We hope this update proves useful to you.

     

    Best regards.
    4 May 2012, 02:08 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2123) | Send Message
     
    Author’s reply » Greetings Paco46,
    Our favored approach is to consider what the downside risks are before any other consideration. Based on the technicals, using Dow Theory, NFLX has the following downside targets:

     

    -$106.04
    -$95.12 (fair value)
    -$84.20
    -62.36

     

    The way we approach an investment such as NFLX (high tech stocks) is to predetermine the amount that we’re going to invest beforehand. Then we would apply 50% of the funds at the $95.12 level. Only if NFLX declines to between $84.20 and $72 (or $62.36), we would apply the second amount of funds.

     

    If NFLX increases in value then we typically apply the funds that were set aside for the second purchase to another undervalued stock. Additionally, we consider selling when our gains have exceeded more than 10% in less than a year for dividend paying stocks and 20% within a year for non-dividend paying stocks. This only applies to tax-deferred account and non-taxable accounts like traditional IRAs and Roth IRAs.

     

    At the extreme end of the spectrum, we’re in agreement with Herb Greenberg’s off the wall call that NFLX would get bought by Facebook (found here:http://bit.ly/HQZxIz) or some other large media company.

     

    We have no insight on the prospects for NFLX’s earnings.

     

    Thank you for considering our work and your thoughtful questions.

     

    Best regards.
    17 Apr 2012, 05:22 PM Reply Like
  • New Low Observer
    , contributor
    Comments (2123) | Send Message
     
    Author’s reply » After the April 17, 2012 estimate of downside targets, NFLX fell as low as $52.81. The low price of $52.81 was exactly in between our updated downside target of May 4, 2012.

     

    After achieving all of our primary downside targets as indicated on 4/17/2012, NFLX has new upside targets. The following are the upside targets from the $52.81 low:

     

    $79.68
    $106.55
    $133.42

     

    Failure to exceed any of the upside targets could result in retracing halfway back to prior lows. In this case, NFLX could revert back to $66.25 if it is unable to meaningfully exceed $79.68. This could be within the context of rising to the next upside target.

     

    Regards.
    1 Nov 2012, 12:01 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9966) | Send Message
     
    An interesting article and approach. Worth considering further.
    17 Apr 2012, 06:09 PM Reply Like
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