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Vinnystocktips 06-22-2011 10:40 PM

Netflix Ready to go Lower with Market
Monday I said those words that you usually do not hear from people trying to predict the move of the market, "I just do not know which way it is going to go in the short term." Today however, the market gave some very strong signals and I think we still have further to go on the downside. So be it I closed my short position in OpenTable a few days ago, but on a down day that stock was up. Might have been a good move and I will move on since my target price was hit and I covered. Remember not to be greedy and there is always another play if you successfully reach your target price! In my opinion that new short is Netflix.

First of all, the market did not like what was said by the FED today. The market wandered along all day barely moving and once the FED made their statement which just sounded quite gloomy, the market decided to dive 80 points pretty quickly. Very bad sign, there is more downside to come.

On top of that, oil jumped. That is pretty counter-intuitive as well, but not in today's trader market. Even though there is supposed to be less demand, the price of oil went up. How is that? Well speculators are jumping back in commodities for safety and because it is pretty inevitable that Greece is going to default at some level which will cause other European coutries to have to bail them out or at least the Greek banks and that will lower the value of European currencies which will cause US dollar to increase in value. What happens when dollar strengthens in last couple years? Commodities rise. Higher oil compounds the issues because it pinches the consumer which inhibits any kind of growth. I wrote about how my target price for oil was $85 or lower in order for the market to go up. I have not left that thesis.

Ok, now that I have discussed why I think the overall market is going to go lower, let me add on my thesis on Netflix, and why I think it is a good short. Netflix is a growth stock, doubling and doubling again in the last couple years. Now any signal of slower growth, and the P/E multiple compresses. Netflix has a P/E in the 70's for this year and in the high 30's for a forward P/E ratio. In order to maintain those ratios the company needs to still grow quickly and this becomes much more difficult with the addition of stronger competition. This is exactly what happened today with the announcement by HULU that it was hiring Morgan Stanley to help advise on putting itself up for sale in the market. This means that they either are out of cash and need someone to come in and pay there bills which most likely would be a Netflix buyer; or they are seeing too much pressure in the future by the big boys like Amazon and Apple. Either way this is going to be represented as bad news for Netflix as sellers are looking for any excuse to take profits and get spooked.

Because of this combination, I feel Netflix is a good short especially if the market is heading lower.



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