Monday, February 2, 2009

Bookkeeping: Short Netflix (NFLX)

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I am employing the same strategy I did for ITT Educational (ESI) [Jan 22: Bookkeeping: Short ITT Educational] with Netflix (NFLX); in that case a stock gapped strongly after earnings, created a "gap" in the chart and came back to fill it. If I could keep track of so many positions I'd actually want to go long at the gap... these chart set ups are perfect for that (once the gap is filled, go long young man!) as ESI has flown higher since it filled the gap. The day we covered was the red line on the 26th. I am lamenting I did not go long once that gap was pulled... I'd already be up a cool $15.

Now, Netflix has a chart similar set up - I am going to attempt a short here at $37 and cover at the gap - $31.50. And this time, unlike with ESI, I am going to use that as a pivot point and go long @ $31.50 so I have a limit buy order waiting there. This sort of set up is actually quite dangerous on the short side in bull markets where gaps don't fill many times for months or indeed quarters... the stock can run away from you and your short position gets toasted. But in a bear I will take the chance.

I am also eyeing the same set up in Amazon (AMZN) but right now the stock is too strong to mess with. Maybe in a day or two. Netflix (NFLX) is a few days further along in its run so appears to be petering out. (unless the market takes off upward in which case people will pile back in)

I have to say I've been a doubter of the long term business model with Netflix (NFLX) but the move away from mailing DVDs and getting direct streams online is one I agree with. My only "scratch my head" thesis with this, is why are the cable companies, satellite companies and the like not providing the same "library" to viewers? It seems they can replace Netflix in a moment if they do so. But for now, it seems Netflix has the niche to itself and its last earnings were impressive. Theoretically if they can just keep revenue flat, and stream instead of mail - their profits should jump immensily due to lower costs. And this is a great stock for the Pooring of America movement I've been on for a year and a half... cheap entertainment.
  • Netflix is predicting that as the economy continues its downward spiral, more Americans are going to retreat to their couches, meaning more money for the online DVD rental service.
  • On Tuesday shares soared 15.5%, or $4.67, to close at $34.82 in the wake of the company's announcement after the bell on Monday of earnings that beat analysts' estimates. It also added more than twice the number of customers management expected.
  • "It's very clear streaming is energizing our growth," Hastings told analysts during Netflix's conference call. Although Netflix doesn't earn any additional revenue from its streaming service, it hopes streaming will help it lure new customers and save money on reduced mailing costs.
  • Netflix’s fourth-quarter profit, for the three months ended Dec. 31, jumped 45.0% to $22.7 million, or 38 cents a share, up from $15.7 million, or 23 cents a share, in the prior year. Excluding stock-based compensation costs, Netflix reported it would have earned $24.6 million, or 41 cents a share. Analysts expected a profit of 34 cents a share.
  • The company’s revenue shot up to $359.6 million, from $302.4 million in the prior year
  • Netflix said it added 718,000 customers from the third quarter to the fourth quarter, more than double management’s growth expectations. The company ended the year with just under 9.4 million customers through December, 26.0% more than in 2007. On top of that, the amount the company paid to acquire each customer dropped to $26.67 per subscriber, down from $34.58 in the prior year.
  • The company also said its board has approved a stock buyback program for 2009 of up to $175.0 million.
I am short with a 3.3% stake @ $37.00. My target is $31.50 (15% return). I will go long if/when $31.50 hits with a 3% stake. I will stop out if the stock breaches the recent high ($38) @ $38.25 (-3.3%)

p.s. I don't know what it is with S&P 820, but this is a magnet like no other.

Short Netflix in fund and personal account

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