Netflix, Inc. (ticker symbol: $NFLX) provides Internet television network service that enables subscribers to stream TV shows and movies directly on TVs, computers, and mobile devices in the United States and internationally. I assume the title of this blog post gives away that I am bullish on the stock, so let’s jump into the reasons why:
1) Strong fundamentals. Although their revenue growth has slowed recently, earnings are expected to grow +372% this year and +118% in 2014. Netflix current gross profit margin of 78.5% is very high.
2) Strong technicals. After its enormous run so far this year, the fact that the stock has barely given back any of its gains is very strong. The stock is consolidating well near its 20-day moving average.
3) Highly shorted. So many people HATE this company. Why? Mainly because of its high PE (which is absolutely the dumbest reason to short a stock in my opinion). If the market continues to cooperate, a short squeeze could help force the stock higher.
4) Carl Icahn. Mr. Icahn took a large position in NFLX last quarter. The company said: “We have had constructive conversations with him about building a more valuable company.” I don’t argue with success, especially with one of the sharpest activist investors out there.
5) Options market. My good friend Joe Kunkle (@OptionsHawk) runs a tremendous premium service that I subscribe to for tracking large option trades in the market. He recently flagged strong bullish option flow in NFLX and was generous enough to tweet it to his followers. I love when his work coincides with mine. It gives me more conviction when I know the “Big Boys” are on my side. I plan on doing a blog post soon about how I use his service, but for now, definitely check it out.
Here is my suggested trade (the stock closed at 183 on 3/20/13):
For long-term players, suggested stop 163, 12-month target 250. 67 points of potential upside with 20 points of potential downside makes it a healthy 3.4R trade.
For shorter-term swing traders, suggested stop 173, upside target 220, a 3.7R trade.
One final note: I generally struggle with giving real-time trade ideas because I don’t know the reader’s time-frame, risk tolerance, financial objectives, etc. This is simply an idea. If it’s something you like, make sure to stick to your stop in case the stock turns against you. In interest of full disclosure, I currently have a position in the stock, but this could change at any time. Good luck!
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