Is It Finally Safe To Buy Netflix?

Netflix disappointed investors last summer when its quarterly earnings report fell flat, triggering a long and bloody slide that shaved more than 25% off the stock. But as is often the case, the market overreacted. After two months of relentless selling, long-time bulls finally reached their breaking point last September and unloaded the stock in the biggest three-day selloff since the initial earnings disappointment.

But rather than signal the start of the next leg lower, that frenzied selling represented the capitulation bottom. This is when things finally got “so bad they were good.” And that is exactly what I told subscribers when it happened.

As bad as NFLX looked back then, we should never lose sight of the fact that risk is a function of height. The lower a stock falls, the less room it has left to fall. While we cannot use this logic on dying companies and obsolete industries, it works really well when we believe in the underlying fundamentals.

A person with a lot of courage and a sensible stop just under the lows could have bought NFLX last September when everyone else was selling it. The first good sign was when prices refused to undercut the lows and bounced. That was our signal to add more to our initial position. Then, a few weeks later, the company announced earnings in October. But rather than fear another earnings disappointment, savvy investors knew the latest selloff lowered expectations so much that this time around the bar would be far easier to clear. And as expected, the stock popped following earnings.

Unfortunately, nothing is ever easy in the market and regretful owners who bought at much higher prices used that post-earnings strength to finally get out. But as is usually the case, the crowd gets it wrong and that happened again here. Rather than fear another tumble lower, opportunistic investors should have been buying the stock. The worst was already behind it and sentiment had finally turned. From that point on, Netflix has done nothing but climb and today is within a few points of making all-time highs.

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Those that had the courage to go against the crowd are counting their profits. Those that listened to the herd are left wondering what happened. While I still like NFLX at these levels, buying now is definitely late in the game. While the stock will almost certainly continue higher, the easy money is long gone.

Written By: Jani Ziedins