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David Crosetti
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I was born and raised in California. I worked in the family business for a number of years and then decided to spread my wings and try working for someone else. My first significant job was with Frito Lay. After a stint in the salty snack business, I transitioned to the beverage industry,... More
  • Avoid The Noise: Valuation Leads To Investment Success 16 comments
    Oct 22, 2013 1:40 PM | about stocks: CA, CSX, KO, NSC, SPLS, SWY, WU, NFLX

    Introduction:

    I just want to make one thing perfectly clear. As a Dividend Growth Investor, a company like Netflix (NASDAQ:NFLX) is not a company that I would choose as an investment. My reasons have nothing to do with my primary investment strategy. As a matter of fact, I use Netflix all the time. Sometimes, my cable provider does not offer a lot of the movies that I want to see, so very often we turn to Netflix to have access to a particular movie when we are all at the house and want to watch something new.

    Netflix, however, gives investors a very nice insight into the world of stock market valuations and especially the world of stock market pundits. It's a very interesting world, one that you should be familiar with, and one that you should probably tune out of your investment decisions.

    As you may or may not know, Netflix announced earnings today (October 21st). The results were better than expected and the stock was up $21.49 today, or 6.44%. That's pretty impressive, if you ask me. But that's only part of the story. In "after hours" trading, Netflix continued to advance in price. Checking a few minutes ago, the stock was up an additional $37.61 a share which is an additional 10.5% increase. The stock is listed at $392.50 as I write this.

    What You Should Know:

    I came across an article a few minutes ago that was written on October 18th. The title of the article is: "Netflix Is A Screaming Sell Amid Earnings Pressure." (Link:tinyurl.com/lphfew8 The author of the article has this to say about the company:

    Netflix (NFLX) is set to report earnings on Monday. And the million-dollar questions for NFLX stock investors are whether it has made enough strides overseas and whether it can post the growth necessary to live up to its soaring valuation.

    NFLX investors better prepare themselves for the answer to that question to be "no way."

    That's because Netflix stock is facing a history of unprofitable foreign operations, increased content costs and the hard reality of a bandwidth bottleneck that will limit growth for NFLX as long as it relies on reliable high-speed Internet.

    And while Netflix is racing to evolve its business in the long-term and admittedly has a strong core of subscribers that believe in the NFLX brand … the pain might start to materialize in Netflix earnings as soon as this fall, but definitely in 2014.

    Now, it is not my intention to call out the author, nor is it my intention to criticize his opinions, relative to Netflix. My intentions are to point out a very disturbing trend in listening to stock market "gurus" who tell you what to buy or what to sell.

    For every article like this one, there is an article that takes the other side, with the author telling you that a particular company is a "screaming buy." Somewhere in the middle, you might find some truth. Just don't be misled by these articles and buy into a particular "guru" promoting a particular stock.

    Instead, the best practice that you can utilize as an investor, regardless of your own investment strategy is to do your own due diligence and to arrive at your metrics for determining individual stock valuation levels.

    What You Should Know:

    While we are discussing Netflix here, we could actually be substituting almost any company for the purposes of our discussion. Netflix just presents a very interesting picture. Let's look at the price history of this company.

    (click to enlarge)

    From 2008 through July of 2011, Netflix was on a tear, price wise. It went from $25 a share to almost $300 a share in that time frame. If you go back and look at the articles being written about this company, it was the best thing since "sliced bread."

    But, the company decided to make some changes in its business model. The company decided to change its fee structure to subscribers and those subscribers did not like it one bit. By September of 2011, Netflix subscribers voted with their feet and some 800,000 of them said, "See you later." The price of the stock reached a low point, just under $55 a share.

    I do not recommend stocks for you or anyone else to buy. I will write articles about what I might be doing in my own portfolios and update results on a regular basis. In no way am I recommending any stock at any time. Just telling you what's going on with my own investments.

    When Netflix was a relatively "newborn" company, it might have been a company that I would have considered owning. My children, who were still living at home, were big fans of Netflix, because they didn't have to go to the store (Blockbuster) only to find that the movie that they wanted to see was out of stock and then having to settle on something else. They also didn't like to return the movies and I was always paying fees for being late on our rentals.

    So, a company like Netflix shows up and you can get your movies in the mail. When you're done with the movie, just stick it back into the mail and you're done. Wash, rinse, repeat. This company had all the earmarks of a company that would be a Peter Lynch discovery.

    When Netflix converted from movies in the mail, to movies streamed directly to your computer, the entire video rental industry was turned upside down. Netflix share price took off and into the stratosphere it went.

    What I Know:

    Netflix was a "perfect story." When you really dig into the numbers, the company is a financial analyst's dream. For Joe Retail investor, not so much. The downfall of the company was in not knowing what their customer base wanted from management. The price change, while not a "deal breaker" by any stretch, just made people who used the service go ballistic.

    In some ways, it reminded me of the time when Coca-Cola (NYSE:KO) decided to change the formula so that the product would "taste more like Pepsi." Having lived through that nightmare, I have to tell you, it was not a pleasant experience.

    Netflix bottomed out at around $55 a share. Now, some of the pundits were saying, Netflix is dead and others were saying Netflix will rise again. I have to admit that when the stock was trading under $60 a share, my intuitive nature began to lean in a direction that I refer to as the "dark side." (Growth stocks for the uninformed.)

    But, truth be known, I did not move on this company, I did not purchase any stock, and I do not have any story to tell you about how I made a fortune with Netflix.

    Things Too Consider:

    In recent articles, I've discussed "thinking outside of the box." As a Dividend Growth Investor, my box is a very comfortable place for me. When I look at stocks to add to my portfolio, they are often times companies that pay a dividend and often times are members of the Dividend Champion, Contender, and Challenger lists.

    Lately, I've looked at companies that are not CCC companies as "value" is getting a little hard to find in the more traditional circles of DG stocks. My methodology is quite simple, actually. I run a screen at Schwab and I format that screen to reflect my own criteria for selecting stocks. That screen produces a list of companies that meet the metrics of the screen, but the stocks that are produced by the screen are not all stocks that I am going to buy.

    Instead the stocks produced by the screen are like a 50lb sack of potatoes. Inside that sack there are going to be some magnificent potatoes; there will be some nice potatoes; and there will be some really lousy potatoes. Going through the sack means that I will find some potatoes that will become baked, some that will end up as French fries, and some that will end up being mashed.

    The screen just gives me a sack. My job, your job, is to filter through the sack and grade each potato relative to how you are going to use it.

    As many of my readers are aware, I don't buy stocks all the time. The most discussed purchases that we've made in the last year were Safeway (NYSE:SWY), Staples (NASDAQ:SPLS), CA Technology (NASDAQ:CA), Western Union (NYSE:WU), CSX Corp (NYSE:CSX) and Norfolk Southern (NYSE:NSC).

    Each of these companies were produced from a screen. There were plenty of other stocks besides these six in that screen. But what separated these stocks from the others was their value at the time that we purchased them. At that particular moment in time, these stocks, according to my own valuation methods were "screaming buys." But things change. The markets are always moving. Sometimes up, sometimes down, sometimes sideways.

    Summary and Conclusion:

    Just because these companies that we added to our portfolio presented a value back in November of 2012, does not mean that they are a value today. Just like Netflix represented a value back in September when the price was under $60 does not mean that it is a value today.

    When we take the time to really dig into the fundamentals of a company, sometimes we find that a company we really want to own just doesn't make a lot of sense as an investment right now. I have to admit that sometimes I can get impatient, but once you start thinking outside of the box a little, you can find opportunities regardless of your own individual investment strategy.

    In a nutshell, that old cliché of "buy low" makes more and more sense every day.

    Disclosure: I am long CA, CSX, SPLS, WU, NSC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: CA, CSX, KO, NSC, SPLS, SWY, WU, NFLX
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Comments (16)
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  • Regarded Solutions
    , contributor
    Comments (15777) | Send Message
     
    Hi David....you know that my Young and Restless portfolio made a bundle on NFLX, right? Well, I also would never put it into a pure retirement portfolio either....:)
    22 Oct 2013, 02:40 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10334) | Send Message
     
    Author’s reply » Not a retirement stock, but one of those capital gains plays that when the valuation is there, you might consider, depending on your risk tolerance.

     

    When I bought HPQ as part of my Dogs of the Dow, it was criticized pretty roundly.

     

    I didn't hold onto HPQ, but exited pretty near this years top. I love capital gains, just not the same way I love dividend income at my age.

     

    Dave
    22 Oct 2013, 03:51 PM Reply Like
  • mbn
    , contributor
    Comments (447) | Send Message
     
    Hi guy;

     

    "Noise" is always going to be there. It is sometimes difficult to separate the wheat from the chaff. However, I make every effort to just find the facts, and leave opinions out of it.
    22 Oct 2013, 03:18 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10334) | Send Message
     
    Author’s reply » MNB:

     

    When I start second quessing myself, because of the noise, then I usually miss out on a very good purchase decision.

     

    I look at the numbers, form my own opinion and let it rock. Most of the time on the growth stocks that I've bought, the results have been pleasing.

     

    Of course one might say that it doesn't take a genius to pick winners in a bull market.

     

    Dave
    22 Oct 2013, 03:53 PM Reply Like
  • mbn
    , contributor
    Comments (447) | Send Message
     
    "Of course one might say that it doesn't take a genius to pick winners in a bull market"

     

    You would be surprised. I know of several folks who have performed rather poorly since 2008-2009, for example. They are always chasing the "next best thing", and that never works. Slow and steady wins the race.

     

    I also look at the numbers, look at some analysis (Value Line, M*, some things on Fidelity, a couple of places on the web), and go from there. The analysis is something I can do without, although I do like to read some conflicting opinions, especially if they differ from my conclusions. Hey, 'ya never know what someone else picked up that I missed!!
    22 Oct 2013, 04:36 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10334) | Send Message
     
    Author’s reply » MBN:

     

    It's is indeed sad to think that there are people who have not done well for themselves in this bull market.

     

    Dave
    22 Oct 2013, 04:55 PM Reply Like
  • Reim
    , contributor
    Comments (191) | Send Message
     
    My wife dragged me to a retirement semiar, there was over 150 people there. The speaker asked those who had lost money in the stock market in the last year to raise their hands. Over half of them did! Such a shame. The goverment better keep social security funded.....
    22 Oct 2013, 05:32 PM Reply Like
  • HackFab
    , contributor
    Comments (986) | Send Message
     
    "My wife dragged me to a retirement seminar..."

     

    I hope you got a free meal out of it, as the ones I've been to are pretty worthless. And I'm attending another (for the free meal) next month.

     

    "The speaker asked those who had lost money in the stock market in the last year to raise their hands. Over half of them did!"

     

    Well, either they are making mistakes, or the people managing their money are making mistakes and should be fired.

     

    25 Oct 2013, 04:14 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4290) | Send Message
     
    Hack, are the meals worth it?

     

    Miz
    25 Oct 2013, 04:43 PM Reply Like
  • HackFab
    , contributor
    Comments (986) | Send Message
     
    Actually, all the meals we've had (we've been to three 'seminars' so far), have been great. The 'seminars' (sales pitches in disguise) are usually held at a local restaurant, and the meal is a choice from a couple items on the menu. One was a Mitchell's Fish Market, another at Rose's (local Italian joint), the next one is at Fleming's Prime Steakhouse.

     

    If we can keep our bar tab under control (no open bar...dang..), it's a cheap night out, with a comedy show (financial presentation/sales pitch) tossed in....
    29 Oct 2013, 12:09 AM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4290) | Send Message
     
    Doesn't sound too bad, Hack. :)

     

    Miz
    29 Oct 2013, 05:32 AM Reply Like
  • HackFab
    , contributor
    Comments (986) | Send Message
     
    It really is less painful than a timeshare presentation....

     

    Also sorta fun to listen to how the presenters 'tip-toe' around what they are really selling. The first one we attended, the guy NEVER mentioned the work insurance or annuity. NEVER. But that is exactly what he was selling.

     

    I'm not anti annuity, but I am anti deception. Sorta fun to catch them off guard too, as they tend to 'dumb down' alot of the rhetoric. Which is another form of deception.
    29 Oct 2013, 02:43 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10334) | Send Message
     
    Author’s reply » Miz:

     

    If you like the kind of meals that they serve at Republican or Democrat fund raisers. You know, rubber chicken...............

     

    Dave
    25 Oct 2013, 05:26 PM Reply Like
  • Miz Magic DiviDogs
    , contributor
    Comments (4290) | Send Message
     
    Dave, I kinda figured as much. :)

     

    Miz
    25 Oct 2013, 06:07 PM Reply Like
  • PendragonY
    , contributor
    Comments (6002) | Send Message
     
    Actually at Republican diners anyway the food isn't too bad. Much the same as some charity functions I went to. Breakfasts are better though.
    25 Oct 2013, 07:19 PM Reply Like
  • David Crosetti
    , contributor
    Comments (10334) | Send Message
     
    Author’s reply » They also serve up a lot of baloney,

     

    Dave
    25 Oct 2013, 07:02 PM Reply Like
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