Doc’s note: Human nature is expecting good times to last… But, as Extreme Value editor Dan Ferris explains, that sort of thinking can get you into trouble in the markets.
In today’s essay, Dan details a Wall Street darling you might have in your portfolio that isn’t such a darling anymore…
One thing is clear: The future looks bleak for Netflix.
In July, the video-streaming company announced that its U.S. subscriber count declined for the first time in almost 10 years.
The company lost roughly 130,000 U.S. subscribers in the second quarter of the year, compared to the end of the first quarter. It added 2.7 million total paid subscribers worldwide, but that was much less than its forecast of 5 million.
Not surprisingly, investors punished Netflix’s stock… Shares closed at $325.21 the day of the announcement – down more than 10% from their close the day before.
Of course, the stock is still a 50-bagger over the past 10 years.
But because of its long-running success, Netflix’s stock is still very expensive… which could indicate that many folks believe the company will shake off the latest bad news.
That’s just human nature. You expect the good times to last far longer than you should. But that sort of thinking can get you into trouble in the markets.
If you want to avoid trouble, you must answer one question before putting money to work today.
Let me show you what I mean…
For too long, Netflix and other high-flying stocks have been considered no-brainers – the “best of the best” that you could buy at any price and hold indefinitely.
But we’ve seen this movie before…
On several occasions over the past couple years, I’ve likened today’s “FAANG stocks” – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix, and Google parent Alphabet (GOOGL) – to Cisco Systems (CSCO) during the dot-com frenzy.
Cisco makes routers and switches, the basic “plumbing” that makes the Internet possible. Its stock was owned by all of the top mutual funds of its day. You couldn’t go wrong owning it at any price.
Until the dot-com bubble burst.
The stock peaked at $80 per share in March 2000. Today, nearly 20 years later, it still hasn’t broken even yet.
It’s not that Cisco wasn’t a great business. It was well-managed, way ahead of all its competition, growing rapidly, and gushing cash earnings. But everybody thought it was the greatest business on earth.
When everybody on earth thinks an investment is a no-brainer, you should question it.
Right now, that means you should question whether Netflix’s future returns will resemble the incredible 50-bagger it has generated over the past decade… or more like a company that faces increased competition in its space and just lost U.S. subscribers for the first time in almost a decade.
I’ll leave it to you whether you should question the other FAANG stocks, too. For my own part, I don’t question that they’re incredible businesses. I question whether they’re less attractive today as long-term investments.
Maybe you can make a ton of money buying Netflix at more than 110 times earnings with competition coming out of the woodwork…
But should you bet that way?
It’s a question worth asking yourself before putting your hard-earned money to work.
If what you’re doing isn’t likely to generate results in a time frame that makes sense for you, think about changing your strategy. Maybe many investors who’ve gotten it right for the past 10 years with high-flying stocks like Netflix should consider changing a little of what they’re doing these days…
P.S. A huge market event happened on September 9. If you’ve followed my colleague Steve Sjuggerud’s Melt Up idea… or if you own any FAANG stocks…
Or, frankly, if you’ve made any money AT ALL during this historic 10-year bull market, you need to understand what took place on September 9.
Every dollar of the profits you’ve made is now on the line.