Fadi El-Eter

Netflix is now at an all time high (at $132), some people are going to lose some very serious money on this stock. I’ve traded this stock before and thankfully I got out of it. The stock is up 140% for this year alone, and this is too good to be true for a stock that was downgraded by 3 different institutions since May, but again, the term “Buy the rumor, sell the truth” prevails, and no one really cares about the company as long as the general sentiment on NFLX is bullish.

Here’s why I think the stock is way over valued and the correction that happened in July was not sufficient (where the stock went down to the 90s). Investors, in general, are valuing the stock on what the company will become, if it can sustain its growth rate, and not what it currently is. They’re also assuming that Netflix will never ever have any real competitors (after the death of Blockbuster). Hmmm…

Now this is my opinion: Netflix currently has around 15 million subscribers in the US charging them about $9/month. 15 million = 5% of the total US population, which means that they have a penetration rate of 5%, quite high for a service that not everyone needs. Penetration rate is a term used in mobile operators, and some of the best mobile operators in the world have a penetration rate of 10%, but of course, they have competition. But unlike a Netflix subscription, a mobile is a necessity in this day and age; watching a movie is not.

Let’s also filter those numbers better, if Netflix has 15 million subscribers, then, it’s logical to assume that those subscribers represent households (I don’t think the father, the mother, the daughter, and the son will each have their own Netflix subscription). The average US household size is 2.59. So the 15 million subscribers represent 15,000,000 x 2.59 = 38,850,000, which means that the real penetration rate of Netflix is around 13% of the total US population. Wow! That is very impressive, that’s bigger than most of the biggest mobile companies out there.

Now one might ask, why am I comparing Netflix to mobile companies? First of all, they’re both Services, they both depend on subscriber growth as well as some artistic ways to get more money from their subscribers (e.g. offering new services), and it’s very hard for both of them to increase their prices without raising eyebrows and without increasing their churn rate. A very important common characteristic also is that both of them are extremely sensitive to what happens with their competitor, but Netflix is so far blessed that the only competitor, Blockbuster, is now on the Pink sheet, where the loss of 4 cents means shedding 25% of the value of the stock.

Blockbuster may be dead, but it’s not hard at all to create a company that mimics Netflix. It only needs some cash. Netflix is not Microsoft, it is not offering a product, it is just offering a service that anyone/anywhere can replicate.

In my opinion, the real price of Netflix should be at most $70 less than what it is at the moment (which is $132), but then again, investors think that the US population will double in 2011, and if that doesn’t happen, they think Netflix can reach a penetration rate of 30% next year, meaning one in every 3 households will have a Netflix subscription. Not to mention, of course, that they think the serious amount of cash that Netflix is generating will not light a bulb in an investor’s head somewhere who will very easily mimic their business model and creates some serious competition. And finally, investors apparently feel that the economy is very healthy for a service stock depending directly on household income to grow exponentially. The whole recession thing is a crock anyway…

Get out of this stock, it’s way overvalued!

In the same visit I did to check the availability of Apple products, I check the aisle of video games. For the last few months, I have the consistent feeling that this aisle is deserted, unattended, and unimportant to the retailer (again, this is the biggest retailer in Canada). I can’t remember when was the last time when I saw an important new game being released (on any platform). I also see that the aisle has almost 50% less games than before (they’re displaying other products in places where games used to be displayed), and the variety of games is very little. Are people losing interest in video games in general, favoring flash games such as those made by Zynga? Is the video game industry, in general, slacking? Could this be related to the decreased consumer spending and the lack of investment in new products?

I’ve also noticed that all the consoles are in stock, and they are abundant. They have a lot of PS3s, a lot of WIIs (which were very hard to get a few months ago), a lot of XBOXes, and they all have a special bundle on them (for example, a free game) in order to attract customers.

Google trends support my theory: See how the attention to PS3, WII, and XBOX is lower (not significantly, but enough to raise some eyebrows) than a year ago.

Additionally, all these manufacturers are increasingly exposed to the inflation in the China, and the increase of cost of Chinese labor. On the flip side, the cost of technology is reduced with time, so they might even out each other, but again, this is a huge concern.

Stocks that are directly affected by Video Games are: GME, MSFT, SNE, NTDOY (PINK). In my opinion, the stock mostly reflecting this situation is that of Nintendo, it is down 12% in the last 3 months. All of these companies, especially GME, are excellent companies with good balance sheets, but they’re selling/producing things that the mainstream market is no longer very interested in. People now are socializing more, and playing less…

Every time I check AAPL through my investor account, I see a big buy recommendation (strong buy) predicting that the stock will be at $325 by the end of the year. I was always wondering how much that recommendation relates to real life, so I just paid a visit to my local electronics retailer, which is the largest retailer in Canada.

I asked if they had ipads in stock, which they gladly answered yes, and tried to sell one of the 6 models they have (and they have them all). Ebay is full of online retailers just trying to offload all the ipads they have in stock. I then asked about the iphone 4, they had none in stock, but they will have early next week. Hmmm… Bottom line there is no shortage, or maybe there is no demand?

On the way back I was thinking about the ipad, sure it’s a very nice gadget, and I will definitely buy one for my sister, but the thing is, it’s very expensive for what it can do. In my opinion, it’s a toy, no more no less. Of course there is this glimpse of hope for Apple where online newspapers will all become paid services on the ipad, which will turn the ipad into a need more than a want (the want factor is already not that high).

Apple has a lot of tricks under its sleeve still, the istore with all the trash they sell to people generates a lot of money. The computer section is another good thing, but I’m sure this area will be soon in decline, as their market share is decreasing, and the general market for computers is not that strong.

Let’s summarize this post:

– ipad sales are disappointing, and the ipad is in desperate need for some strategic alliances with online newspapers and other services to turn into a need. I also do think that Apple will have no other choice but to lower its price, sooner or later.
– iphone 4 sales are strong, but not that strong (as Apple executives thought). The antennagate still weighs on the sales, and I do think that the market is now a bit saturated with all these smartphones, including the older version of the iphone.
– Computer sales are most likely in a downtrend, due to the loss of market share and the general weak market for computer sales.

There is another important thing to mention, the Chinese factories producing the ipads and the iphones are currently under scrutiny (child labor) and they are forced to give raises to their workers. Of course, the increased costs will be passed to Apple (the company), and that’s where the buck will stop. Apple will not be able to pass the increased costs to its products (we’re not talking about wheat here), and I disagree with a lot of analysts (apparently long on AAPL) that this won’t affect Apple as their profit margin is too high. It will definitely affect Apple, as they won’t be able to raise the price to cover these increased costs, and they are, with time, forced to reduce the price of these already overpriced toys.

AAPL is a strong buy below $240, but I’d be surprised if the stock closes the year above the $280 mark.

I did buy Mellanox 3 weeks ago at around $16. I sold the stock almost immediately at a very small loss, as I figured that I entered at the wrong moment (this was a wrong decision though as the stock rebounded to $17). Ever since, I started following the stock as I think it’s very interesting. The company fundamentals are great, the company has never lost money (from what I’ve read), and they keep getting more and more contracts (they have just secured one with NASA). There is no reason why this stock is going down other than scared investors overselling.

I think MLNX will settle at around 15.50 for the short term, and then it’ll start going up, the stock is a must buy below 15, and it seems to have a good support level at around 14.70. Although the technical analysis of MLNX looks very bearish, I do believe that the stock is very undervalued, unless someone can explain to me why the stock is going down that much.

MLNX already went through a major correction last month, after they lowered their guidance for the next quarter, while beating estimates (they DID beat the estimates). I can’t see any reason why the stock should be going down.

If the stock keeps going down due to selling on low volume, I think the company should make a strategic decision to start buying its own stock, at least temporarily to attract investor’s attention. Even a low volume buy (like 10,000 shares) will send a very positive signal to bullish investors. Take BIOS, for example, where the company executives starting buying stocks (around 30,000 shares @ $4), and the stock just skyrocketed in 2 days. This strategy reassures investors that the company is confident about its future.

Looks like the storm is over, the Nikkei closed up, and some of the European markets closed while in the green. The Dow is still in the red, but it looks to me it’ll close up by the end of the day.

I lost quite a bit of money in this storm, but I learned some very important lessons that will help me in my future trades:

1- Never follow the trend if you can’t sell the stock an hour later
2- Never believe the analysts
3- Never think that a stock will never go down again
4- Only buy a stock after it starts going up after a week of correction (not just 1-2 days).
5- Citi is always good stock below 4

Number 3 is why I made so many bad decisions in my stock picking, I bought BAC at near peak at 14.40, as well as IMAX at 15.25, as I thought any correction will be minor, and the major trend of the stock is up. The bad news that hit the markets have wrecked havoc, and I think they erased trillions of equity value in just a week.

Not knowing Number 4 in the list made me choose to buy BIOS at a high price, as well as MFC. I did make a profit with BIOS, but the stock gave me headache for 2 weeks. MFC is still giving me headaches. I do expect the correction to end soon though, the decline in the stock has shed 5.6 billion of the company market capital so far. There must be an end to this…

Yesterday, I expected the Dow to close today at 10,250, but it closed at 10,320. In my opinion, this is a mark that the market has bottomed.

There was a very bad report today, and frankly I expected the market to respond much more negatively, but thankfully this didn’t happen.

I couldn’t exit none of my stocks, all of them, with the exception of Citi, continued the downtrend. It does seem to me that tomorrow will end the bearish trend for the week, and next week will be mostly bullish. The market should return to what it was 3 weeks ago if there are no bad news coming from Europe.

Two of my stocks lost a lot of money today, CVBF and MFC, but I’m optimistic about both of them, although I wish I entered at a lower price.

BAC will end the downtrend tomorrow, and whoever purchases at this price (even a thousand shares) will make a lot of money in 2 weeks. The stock will, in my opinion, go up at least 15% in the next week or two. BAC is very strong and it’s currently way undervalued. In fact, it is punished by investors for doing the right thing (not charging overdraft fees for $5 transactions).

I have learned something that I always, apparently, seem to forget, that Citi is always a good financial stock to buy. During this storm, the stock dropped only about 5.5%, compare that to BAC that went down 7%.

BP is now a steal at the current price… MOT jumped 4% in the last hour and a half as the Android powered phones surpassed iphone sales in the US.

I was wondering what the ultimate sin stock is for a while now, and it seems that it’s Philip Morris (the makers of Marlboro, among many other cigarette brands). The cigarette company is one of the very few companies that regained its full strength after the 2008-2009 crash. The company (financial) fundamentals are great, and the stock is preferred by low risk investors as its fairly predictable (with the minor hiccups here and there when there’s a major lawsuit).

I do think that PM has still a few dollars to go, but from my personal experience, I am seeing that less people are smoking nowadays, and these people are smoking less (get it?). I think this is connected to regulations in many cities (no smoking in public places, pubs, etc…). Then again, it may just be my imagination. The company is also very diverse and I’m sure they’ll probably come up with something more addictive to suck more people in.

PM is a steady and a strong stock, but it’s also an evil stock (would you encourage a company that spreads diseases?). PM is a buy at around 45-47, and is bullish on the long term. Again, the stock is predictable, and one can make an easy profit when buying at these prices.

If only I had the money, here are the stocks that I think are excellent bargains, but don’t buy until Friday:

– BAC: The stock is now at the low 13s, and I wouldn’t be surprised if it touches the high 12s tomorrow.
– C: The stock will probably close tomorrow at 3.70-3.75. Citi is always an excellent bargain under 4.
– BP: BP went below the $40 level today, closing at $38.80 . The stock went down today not because of BP’s gulf problems, but because of the grim outlook.
– GS: Goldman Sachs is at $149, the stock was at $155 2 days ago. GS is always a bullish stock, and when you feel it’s undervalued you should always buy it.
– FAS: If I can only buy one stock, this would be the one, the market will not remain bearish for eternity. In fact a couple of weeks ago, the general sentiment was that the long term outlook is bullish. One could benefit greatly from FAS if he buys this week.
– AAPL: This stock has fallen so much in the last couple of days and for no reason whatsoever. Apple is one of the best companies out there with the best fundamentals. Assuming Steve Jobs doesn’t die in the next couple of months, you should buy this stock, for a quick rebound in the next week or the week after. Anything at $245 or less is a super must buy.

Stocks to avoid:

I wouldn’t touch RIG or RIMM at these exorbitant prices. I would also wait on MOT until it reaches the low 7s, at this point it would be a great buy.

As I predicted in the morning, it was a very very very bad day. I almost accurately estimated how the DOW will close (at around 10,400 – it closed at 10,378). Needless to say, many traders lost quite a bit of money today, and the bad part that it doesn’t seem to be over yet.

I bought CVBF at around 8.30, as I thought it’s gonna rebound, but it actually went down 30 cents, to 8. I’m sure it will rebound but the storm was so heavy today, especially on the financial sector. The thing, CVBF’s management said that they will buy the stock after it dropped heavily yesterday. This is not the stock that it’s really worrying me, the stock that is really scary in my portfolio at the moment is BAC. I will never ever buy this stock again. I lost so much money on this stock it’s not even funny. All my portfolio is in the red at the moment, so is that of most traders.

Lesson learned, in this situation, I should take cover and not buy anything (well I only bought CVBF for a few thousands, all my portfolio is locked). The best thing to do is to wait until some signs of recovery are in the horizon, and buy FAZ. On the other hand, FAS was an excellent stock to buy when the market was bullish last week. In retrospect, I didn’t have much choice, as I don’t like selling when the stock is in the red (this is the sign of a weak and bad investor).

Of course, the prophets of doom are always there to make the picture even grimmer and to scare the investors. Next week will be another week, BAC, C, IMAX, and CVBF, and MFC are all stocks with solid foundations, and, IMO, all of them are quite a bit undervalued. The thing is BAC is falling a lot because management now believes that they want to do the right thing for their customers, which is not charging for overdraft fees for stupid purchases (like a cup of coffee) when the customer goes over the limit (imagine being charged $20-$30 when you buy a $3 cup of coffee). Apparently this decision will cost them around $10 billion in lost revenue, but I guess a lot of people will appreciate this on the long run.

Tomorrow will be bad, but not as bad as today, the market will be down for another 1% in my opinion, and the DOW will close at around 10250. You heard it here first!

PS: Are you noticing that what’s happening is that the market rebounds for 1-2 consecutive weeks, then a major correction will come and erase all the profits? There seems to be a very interesting trend…

I usually check the Nikkei in the evening, and the STOXX 50 in the morning, to have an idea of what the day is going to look like. It’s not looking good. The Nikkei (closed) is down 2.7% and the STOXX 50 is down 1.82%, this is because the Feds have signaled that the recovery has slowed down (Thanks!). Every other week Bernanke talks, and either trims my profits to to near 0, or makes me lose money on my stocks. The Dow futures is now down 132 points. I expect the Dow to close around 10400, if nothing else happens during the day.

I think I will be stuck with my underperforming stocks for at least the end of the week (most of them are financials). What really hurts is that there are some great deals to be bought right now, but I just don’t have the money at the moment…

No more full long positions for me from now till at least the end of the year. I just want to clean my portfolio now from all the bad equities, so that I can split it into cash and some risky equities…

A good stock that I would buy today is CVBF…