By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 7/25/11 Sign up for free Cabot Wealth Advisory e-newsletter
As to the market, my sense is that the strength of the past few weeks means the market has already discounted the successful resolution of the debt ceiling crisis. So I don’t expect any particular strength when the crisis passes.
But I do see lots of good-looking stocks, and one that’s developing into a great long-term success story is Netflix (NFLX).
The company is well known, but what many observers fail to fully appreciate is the forward-looking strategizing of founder Reed Hastings.
First he crippled Blockbuster and other video stores by introducing the DVD-by-mail business model.
Then he improved on that (and goosed Netflix’s profit margins) by introducing a streaming video service. It wasn’t the first, but it was easy to use and it worked.
Recently, he introduced a new pricing structure that brought howls of outrage from customers because it penalizes those who want to retain the DVD-by-mail option. The stock market, however, liked it.
He’s expanding into Canada and South America with an unlimited streaming service, skipping the DVD step totally.
And now Netflix is getting into the content business, to become a competitor of TV networks and movie studios!
Financially, the company has been a great success. The company has grown revenues every year of the past decade, and grown earnings every year since 2005. In the last quarter, Netflix saw revenues grow 46% to $719 million, while earnings soared 88% to $1.11 per share. The after-tax profit margin was a record-high 8.4%. And analysts have once again raised their earnings forecasts, projecting growth of 54% in 2011 and 47% in 2012.
As for the chart, it’s been in a long-term uptrend since the market bottom of late 2008. Most recently, it pulled back from a high of 300 to touch its 25-day moving average at 270, and I think that offers a decent entry point.
Now, there are two common complaints that some investors will make about this recommendation.
One is that Netflix’s stock price is too high; they’d rather have 1,000 shares of a $3 stock than 10 shares of a $300 stock.
On a primitive level, owning 1,000 shares of something feels good. Plus they dream that the $3 stock might easily jump to $6 and double their money.
Sadly, the truth is that most low-priced stocks wither on the vine. And if they don’t actually inflict losses they’re an expensive parking place. (But if you want guidance on finding those rare good low-priced stocks, I recommend Cabot Small-Cap Confidential.)
The second criticism some people have with a NFLX investment is that it’s too expensive on a valuation basis.
It’s got a price-to-earnings (P/E) ratio of 79, and a forward P/E ratio based on forecast earnings of 61.
To investors stuck in the old paradigm of hunting for P/Es under 20, or even in the single digits, those are nosebleed numbers.
But what these bargain-hunters don’t recognize is that the best growth stocks always have high P/Es. In fact that’s one way to recognize them! Growth stocks generally sell at an above-average multiple of earnings to reflect the strong potential growth of those earnings.
Back in May 2008, for example, Baidu (BIDU), nicknamed the Google of China, was trading at 360. Its P/E was 133, and its forward P/E was 91 … all numbers that are higher than Netflix’s corresponding numbers today.
Well, BIDU has had a 10-for-one split since then, and it now trades at 156, which means its stock is up 333% in those three years!
Now, I don’t think Netflix will do as well, mainly because it’s not growing as fast as Baidu was then. But it might, particularly if Reed Hastings can find a way to get Netflix into the Chinese market. And it’s a no-brainer that this forward-looking wizard is thinking about it!
Editor’s Note: Are you looking to get started investing, but unsure of where to begin? Cabot can help! Tim Lutts is not only Cabot’s publisher, he’s also the editor of Cabot Stock of the Month, which does exactly what the name says: It brings you the best stock across all Cabot sectors for current market conditions each and every month! And these stocks are hand-selected by Tim from across Cabot’s advisories. You could get a fast-growing Chinese issue or a high-quality undervalued stock that’s poised to help you profit. Click here to start building your portfolio today!
By Timothy Lutts, Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 9/7/10 Sign up for free Cabot Wealth Advisory e-newsletter
I’m telling readers of Cabot Stock of the Month to buy, and one of my favorite stocks is Netflix (NFLX), which I recommended to subscribers to my Cabot Stock of the Month back in February when it was trading at 65.
Well, it’s now trading north of 135, and I still like it, mainly because of its growing role in bringing movies, TV shows and more into your home. I’ve been a customer since 2003, when all content arrived through the mail, but today I have a Roku box that streams Netflix content straight to my TV … and I love it. The remote has just a few buttons. It’s easy as pie to work. And Netflix loves when I stream content instead of ordering a DVD, because it costs them only pennies to stream a movie!
And last week Steve Jobs announced a new version of Apple TV that follows the Roku model. No more will users of Apple TV (there weren’t that many to begin with) have to deal with synching and storage issues. From here on, Apple TV (list price $99) will simply stream rented content, from the iTunes store AND the Netflix library as well as ABC and Fox TV … and I predict it will be a big hit.
Now, technically, NFLX looks a tad extended here, so if you don’t own it yet, I think you should wait for a lower-risk entry point. In the meantime, I suggest you take a no-risk trial subscription to Cabot Stock of the Month (it’s just $49 for first-time subscribers) and see what stocks ARE attractive to me today. Click here: Cabot Stock of the Month
President, Chief Investment Strategist, Editor of Cabot Stock of the Month
Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.
By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory, 3/9/09 Sign up for free Cabot Wealth Advisory e-newsletter
Netflix (NFLX) delivers DVDs through the mail, and boasts a growing, loyal customer base. People are watching more movies, both at home and in theaters, so business is growing. And Netflix is ahead of the curve in allowing subscribers to watch unlimited movies online. The stock hit a new high today.
Editor's Note: A new bull market is going to be led by new leaders, and the best source of new ideas is Cabot Top Ten Report. Every week, editor Michael Cintolo uses a proprietary method to screen thousands of stocks, finding those with the strongest buying power. Cabot Top Ten Report has a terrific history of uncovering all the market's leading stocks and sectors—and Mike expects it to do the same for the upcoming bull market. If you want to be onboard the big winners of the next upcycle, we urge you to subscribe to Cabot Top Ten Report now: More on Cabot Top Ten Report.
By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report
From Cabot Wealth Advisory, 2/5/09 Sign up for free Cabot Wealth Advisory e-newsletter
The Netflix (NFLX) story is already well known to most Americans.
The company is the world’s largest online movie rental service, with more than eight million subscribers. It has over 100,000 DVD titles, and a growing database of consumer preferences, so it knows what customers will like. It has a growing library of titles that can be watched instantly thanks to online streaming. This saves the company the expense of buying the DVD, the expense of handling it in the warehouse, and the expense of mailing it...both ways.
I’ve been a Netflix customer since April 2003, and I watched my first streaming video this week.
But here’s why the stock looks good today.
Remember how in the Great Depression people watched movies because they were an inexpensive form of escapism, often sitting in the theater through multiple films? (I don’t remember, but I read about it.) Well, a trip to the theater is no bargain today, but Netflix is! More and more people are staying home to watch movies and the proof is in Netflix’s numbers.
In the past three quarters, revenue growth rates have actually accelerated from 7% to 11% to 16% to 18%. Earnings growth rates have accelerated from 36% to 38% to 58%.
And the chart is strong; it climbed from 18 in October to 30 in mid-January, paused to build a base there for a couple weeks, and then soared to 37 on the heels of a super earnings report.
I don’t recommend buying NFLX here; I think it’s a little overextended, short-term. But I recommend that you keep an eye on it, and try to pick up a little if it pulls back to 34 in calm fashion and builds a healthy base.
Editor’s Note: Netflix is a perfect example of the stocks you’ll find in Cabot Top Ten Report. Every Monday our in-house staff, aided by software program OptiMo, combs through stock charts to find the ten strong charts that are most likely to keep on running higher in the weeks and months ahead. The result is an active investor’s guide to the best moneymaking possibilities TODAY. In past years, Cabot Top Ten Report has been an early recommender of Apple, Baidu, DryShips, eResearch, First Solar, Gamestop, Hansen Natural, Intuitive Surgical, Royal Gold, Titanium Metals and hundreds of other big winners. In 2009, it’s already identified the stocks that are attempting to lead the market higher today. If you want to own the best-performing stocks of 2009, I urge you to give it a try. To get started with a no-risk trial subscription, simply click here: More on Cabot Top Ten Report
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