- Netflix as “the new birth control”
- Like CBS in the ’60s: Netflix’s amazing brand loyalty
- 7x in 2 years: The guy who got NFLX right (after he was wrong)
- The Trump-Clinton oil spike — crude tops $66
- The race to 5G: Apple bows to the inevitable
- Checking in with a reliable recession indicator… “the joker in the deck” when it comes to buybacks… rebates on corporate income taxes… and more!
“Words for Killing a Romantic Mood: Let’s Watch Netflix” is the headline for the quirky “A-hed” story on the front page of this morning’s Wall Street Journal.
Not so long ago, the viral hashtag #NetflixandChill represented a veiled invitation for a romantic interlude.
Nowadays? The article tells us couples frequently label Netflix “the new birth control.” There was even an academic paper in 2017 that suggested streaming video is one reason Americans are having less sex than they did three decades ago.
But we bring up the topic of Netflix for another reason today. It helps us illustrate the story behind a moneymaking strategy so powerful… and so proven… it could leave you set for life.
Let’s return to that headline for a moment: “Netflix” has become synonymous with “streaming video” in a way “Kleenex” has become synonymous with “facial tissue.”
Which means Netflix has accomplished something once thought impossible in the media business.
A couple of decades ago when your editor worked in broadcasting management, consultants and other experts would routinely tell us, “People watch shows, not brands.”
It was their shorthand way of saying times had changed. Gone were the days — maybe you’re old enough to remember — when people would stay glued to one TV channel and felt a certain loyalty to it. CBS had Andy Griffith and Gunsmoke. Why go anywhere else?
But by the 1990s, audience mindsets had shifted dramatically. People might have watched Friends and ER, but that didn’t mean they had a singular devotion to NBC. Media managers who didn’t recognize that reality, we were told, would be left in the dust.
Fast-forward a couple more decades and what’s old is new again: People “watch Netflix.” They’re loyal to the brand. Netflix has Stranger Things and The Crown. (And reruns of Friends.) Why go anywhere else?
Netflix CEO Reed Hastings saw this day coming as long ago as 2002 — when his company was still mailing DVDs to customers and “streaming video” usually meant choppy, low-resolution clips delivered via dial-up modem.
“The dream 20 years from now,” he told Wired magazine, “is to have a global entertainment distribution company that provides a unique channel for film producers and studios…. downloadables as well as DVDs… a full service.”
Not everyone thought Netflix would survive the transition from DVDs to streaming.
But we’re getting ahead of ourselves…
One of the more famous — and prescient — predictions anyone ever made on CNBC was when a hedge fund manager named Whitney Tilson labeled Netflix a buy in 2012.
NFLX happened to bottom near $8 a share that day.
“I made seven times my money on Netflix over the next two years,” Mr. Tilson recalls.
That’s just one of a string of brilliant calls Tilson made over a 20-year hedge fund career. He generated gains of 200–1,400% on a variety of investments.
He bought Apple at $1.50 a share… Amazon at $56… McDonald’s at $15. All of those are mere fractions of their current prices.
He also anticipated the housing bust and financial crisis of 2008… and he had the foresight to declare when it was time to get back into the stock market. That was in December 2008 — three months before the start of an epic bull market still in force today.
But like any good investor, Tilson will tell you he’s learned from his mistakes along the way. And one of the biggest was a bet against NFLX.
“I thought the core business, mailing DVDs, was rapidly declining,” he recalls in a new interview with our friends at Empire Financial Research. “And their new business, streaming movies, faced a lot of competition.”
It was a bad bet. The stock went on to more than double. “I was so frustrated that I wrote an 18-page report entitled ‘Why We’re Short Netflix,’ laying out all of the reasons why I thought the company was going to falter, which would cause the stock to crash.”
Netflix CEO Reed Hastings took note… and issued his own article called “Whitney Tilson: Cover Your [Netflix] Short Now.”
Long story short, Tilson flew out to California to have brunch with Hastings. “He helped me realize I was thinking about Netflix in totally the wrong way.”
Our 5 Mins. are running short today. Two key points: First, you can watch the whole interview with Tilson at this link right now to learn how he adjusted his thinking… and what prompted him to issue his Netflix buy signal in 2012. The story is fascinating, and the results speak for themselves…
The other key point is that “my bet against Netflix is a mistake I’m very, very happy I made,” says Mr. Tilson — “because it led me to what would become the best investment strategy I’ve ever encountered.”
To the markets… where Donald Trump and Hillary Clinton have just sent crude oil screaming nearly 3% higher, to levels last seen nearly six months ago. At last check a barrel of West Texas Intermediate is just a dime away from $66.
Perhaps you heard what the Trump administration did — letting expire all the exemptions to the sanctions on Iranian oil the White House imposed last fall.
That means as of May 2, anyone anywhere in the world who buys Iranian oil is subject to U.S. economic sanctions. That’s 1 million barrels a day of global oil production coming off the market… and no guarantees the president’s “friends” in Saudi Arabia will make up the difference.
China — Iran’s biggest oil customer by far — is on record saying it will defy the sanctions. There’s probably not much Washington can do about it… but it will surely throw a wrench into the trade talks that we were told last week were “making steady progress.”
The news comes at the same time that crude production in Libya is set to tumble. The civil war there is heating up again — you know, the one that Hillary Clinton inadvertently started when she pushed the Obama administration to topple the late Muammar Gaddafi in 2011. (Obama says “failing to plan for the day after” was his biggest regret as president.)
The stock market, for its part, is meandering as a new week begins.
The S&P 500 is up by a microscopic margin, still holding the line on the round number of 2,900. No major earnings reports to speak of today, but the busiest week of earnings season will be underway tomorrow.
The big economic number of the day is existing home sales. Like most housing numbers of late, it’s a disappointment — down 4.9% from February to March.
Housing and consumer spending helped drag down the Chicago Fed National Activity Index. As you might know, we follow this number closely because it has a good track record of forecasting recessions. The latest three-month moving average is minus 0.24 — still comfortably above the danger level of minus 0.7, but nonetheless the weakest reading in nearly three years.
“No one wants to be left in the dust when it comes to 5G,” is Ray Blanco’s assessment of the big tech news of the last week.
By one estimate, 5G wireless technology is liable to be a $251 billion business by 2025. And it’s the reason Apple settled long-standing patent litigation last week with Qualcomm.
With AT&T and Verizon both rolling out 5G networks now, Apple needs a 5G-capable iPhone — and soon. Of late, iPhones have used chips from Intel… and Intel has just given up on developing 5G chips.
That left Apple with few good options, Ray says. “It could wait until it develops its own 5G tech, which will probably take too long to get to market in time (and Apple would still be on the hook for royalties if these chips use Qualcomm intellectual property). The company could turn to Huawei, but in the current environment, using this Chinese supplier is pretty much out of the question, since many countries are looking at banning Huawei 5G equipment outright.”
Qualcomm was the only viable way to go. “The new 5G licensing deal between the two tech companies is good for six years,” Ray says. “Moreover, Apple is going to start buying Qualcomm chips again now that Intel is out of the game.”
QCOM shares ripped 40% higher last week, which surely pleases readers of Technology Profits Confidential. (Ray has a way to play 5G right now that he likes even more — give this a look.)
“I wonder if I’ve spotted the joker in the deck,” writes a Platinum Reserve member on the topic of stock buybacks.
“Share buybacks raise stock prices because money is flowing into the stock market — more buyers than sellers, and all that. But the value of a company that buys back shares is reduced by the amount of the buyback.
“Either their cash reserve is reduced (if they paid cash for the buyback) or the debt they must service is increased (if they borrowed the funds). Thus, the value of a share in the company should not increase, just because there are fewer of them, because the value of the company is proportionally reduced as well.
“Sure, earnings per share will be higher for the moment, but future earnings will face a drag for having to service that additional debt. I understand that from a tax point of view a buyback may be preferable to a dividend, but I suspect that the real motive is that company executives hold lots of stock options that really shoot up as the stock price is juiced higher.
“Overall, I don’t see how a stock buyback makes a company stronger and better able to grow, or to be more resilient in case of a down economy or other adverse situations. It just looks like more financial engineering that benefits the executives, but not the stockholders.”
The 5: All buybacks are not created equal — a point we’ve made before, but maybe not often enough.
Buybacks make the most sense when the stock is cheap. The late Henry Singleton did it over and over when he ran Teledyne. During a span of nearly three decades he bought back 90% of the firm’s shares. Result? An average 20% annual return.
It might even make sense to take on debt to retire shares that pay a high dividend. Intel borrowed $6 billion in 2012 at rates as low as $1.35%… and used the proceeds to retire shares paying a 4.3% yield.
But yes, often buybacks are just another form of financial engineering. That doesn’t mean they can’t push the market still higher as spring transitions to summer — especially now that we’re into the heart of earnings season and the “buyback blackout window” for many companies will be over.
On the topic of companies that avoid corporate income tax, a reader writes: “How about spending some investigative time to explore what legal devices make this possible?
“Only then can one gripe intelligently.
[Our gripes were unintelligent? But please, go on…]
“Generally, businesses ought to pay no income taxes at all, as it stifles their competitiveness and is ultimately paid by consumers anyway. So the tax on rich corporations may be politically popular because of ignorance.”
The 5: Agreed. But when companies collect a rebate from the U.S. Treasury? That feels more, uhh, problematic. Especially when Amazon (for instance) gets its rebates by virtue of a tax break that lets companies write off the value of executive stock options.
Really, we’re looking at the company-level equivalent of the earned income tax credit. Talk about corporate welfare!
The 5 Min. Forecast
P.S. After 20 years on Wall Street — outperforming the S&P by 184% in his first decade — Whitney Tilson is doing something most hedge fund managers never do.
He’s stepping forward and sharing his greatest investment strategy — for reasons that might well shock you.
Tilson typically charges $6,500 per person in speaking fees.
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