Sunday, September 26, 2010

Netflix (slicing up the inefficiencies and preying on the blood of others)

It's tough to find an empty stretcher at the NFLX short ward this weekend.

I'm suffering myself, but fortunately only the slightest of flesh wounds; having taken one brief shot so far on Thursday. Take note of the carnage in here, however - a chorus of unhappy moans fills every corner; stacks of sliced ham to heights only occasionally seen.

I'll likely be shorting this name again very soon.

Not that I think Netflix is over-valued. I look at Comcast and I see a company overvalued. Sure sure sure, your NFLX chart has gone parabolic and every cell in your chord screams at the ridiculousness. Fine. But this whole game is ridiculous. Varying degrees of lesser and greater senselessness.

But that's really why we're here (don't forget your roots young man!). Inefficiencies in the marketplace - that's your bread and butter, right? Sanity is your true enemy. If the markets became sane, the computers would get all the fun (instead of only 95% of it). Leave the wet mop conventions for more normal people. Around here ridiculous is a term for just getting started.

The Netflix market-cap this weekend is $8.5B. Comcast is valued at $52B. Think about that a moment. You're young enough to not pay for cable anymore - you tell me which is more ridiculous. If the market were to value NFLX at only 1/3rd of where Comcast is (currently) priced, then NFLX trades at $332/share. Yes yes, Comcast provides access and services, on top of delivering content, but Netflix has more than half the number of subscribers as Comcast already, and their customer base is growing light years faster. Comcast sells content at unsustainable prices. Seriously, how long will how many pay $70/month to watch TV?. Comcast is essentially delivering content at 15-year ago long-distance phone rates. Cable-TV margins are heading the same direction as the telephone - much much lower. Between Netflix and Comcast, it is the boring old Comcast which is ridiculously valued.

Fortunately I never make decisions based on valuation, common sense, or silly things like that. My accounts would be heavily short Comcast and that position down 6.9% this quarter. And Comcast is low-beta. Common sense trading in higher-beta names would have carved me out of existence many years ago. I'm still standing, stooped over and favoring both knees, precisely because I learned not to focus on such traps. All stocks are over-valued by my measure. I distrust each of them with an equally open mind.

And while old age isn't the greatest gift for 200%+ performance years, it does help to reduce the draw-downs. You learn early on that history has a way of repeating, but over time you see it for yourself. I might have been about your age when Radio began its run to over $500/share in the 1920's; on it's way to under $15 within three years (split-adjusted; RCA split 5-1 in 1929 and traded below $3/share in 1932). The auto stocks savaged shorts for a generation before finding gravity. Lorillard smoked several hundred percent before your parents ever took up smoking. Zenith, Wang, Diners Club, Radio Shack, TCBY, US Robotics, Iomega and endless other bad stocks were passing out straight jackets well before Yahoo bested $250/share, catching your attention. By the time Qualcomm nailed $1,000/share, it had all been seen a thousand times before - before the shorts were ultimately proven correct.

So sure, go ahead and short NFLX. You know you want to. And from what I can tell (at this particular time, for this particular moment), the beast is going to slice downward. Not because it is out of control, over-valued, or anything else warranted by logic. This is simply a (likely) spot where a lesser or greater amount of shakeout is set to take place. A short-term and simple, conventional shake-out.

I'm all for shorting NFLX here, right along with you - but I'm more interesting in getting back long again. I'll be covering about the time you start cheering. I'm excited to finally see: 1.) the table is finally set (what with CNBC now paying hourly attention to an $8B company coincident to signs of distribution within an otherwise very strong tape; all of this on Friday) and 2.) NFLX is truly truly a beast. Why wouldn't I want to be long that?

Point #2 doesn't guarantee the stock hasn't already made its all-time high and it won't Radio its way now into oblivion. Don't accuse me of pretending to know. But when something is this powerful, if it is not because the game itself has misfired dramatically (high frequency trading shooting the moon for no appropriate reason?) then the stock is going to go higher still, ultimately, and usually then higher again after that. The quality of the pullbacks will suggest whether or not there are more highs to fire. At least I have that. I can gauge this from the behavior of the shake-out (assuming we even see one in here). For one thing, if the first slice is dramatic (which is preferable in fact), it should almost always mark a short-term low. Subsequent lows then will be above that first low as the name consolidates and tightens, before eventually starting upward again (re-crowding meat wagons with a new round of heroes who've went and sold short).

Presently, over 20% of the float on NFLX is short. While that concerns me some (calling into question whether this name will ultimately Yahoo the shorts above $300 before dying-off (typically, the higher the short-interest, the more likely that shorts are correct; it is generally smart money that places large short positions. The far more populous 100-share crowd is not capable of swallowing 20% of the float on a mid-cap stock - big money is obviously involved, and big money tends to be thorough with homework)...while this high short-interest concerns me, it also makes for fireworks. So if I ride the NFLX Brahma and keep my head from free from fence posts, bull horns, etc., then ultimately it doesn't matter whether 200 or 300/share is ever achieved. I'm going to find a way to prosper.

There will be fools on both sides of the NFLX tape now, watch. And the potential is good that a high percentage of traders lose vs. gain (longs + shorts combined). When something is so volatile that there are losers en masse, on both sides of the tape, I want to be a part of it. I want the other side of all that pain.

As always, and especially now - don't do what I do. Forget any Earn While you Learn mantra for this play. Only the court jester, and a good one at that, can spit on the king's feet and have him laughing. But he has to read the mood perfectly.

Leave NFLX for me (and perhaps the Fabulous Fabrice!)...to make all the money ;).

Beast out.


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