Thursday was an awful day for Netflix (NASDAQ:NFLX) stock — probably its worst in eight years.
That was the last time the company reported a quarterly loss in U.S. subscribers. And this morning, Netflix did just that: Over the last quarter, Netflix reported a net loss of 126,000 U.S. subscribers. Analysts with FactSet were expecting a 352,000 gain!
Worldwide, Netflix did manage a net gain in subscribers (of 2.7 million)…but only half as many as expected (5 million).
This has created some controversy on Wall Street about whether to abandon NFLX – one of the most popular stocks around. Morgan Stanley says Netflix stock is still a long-term buy; Wedbush Securities says that is “idiotic.”
But ultimately, NFLX was down 11% on the news, and that says it all.
This is, again, a significant reversal. Netflix stock had been chugging along just fine, prior to Thursday. And last month, we cashed out a 120% gain on NFLX in my Accelerated Profits service!
So, today I want to talk about how to know when to sell.
Our exit from NFLX was extremely well timed – but not because of any particular genius on my part. (Although I do like to think, after 40 years, I’ve learned a thing or two.)
It was because I know how to read the signs. And if the other so-called “experts” had taken a good, hard look at Netflix’s last earnings release – they might have avoided this, too!
Back in June, Netflix stock was a great performer. And in the previous quarter, U.S. subscriptions had gained 1.7 million! Overall, subscriptions were up 26% year-over-year. And earnings per share were up, too, by 18.8%.
But there was a big red flag, too. As I put it in my “sell” alert on June 11:
“For the second quarter, Netflix provided weaker-than-expected guidance. As a result, analysts have slashed earnings per share estimates and are now looking for a 34.1% drop in earnings. Let’s take that as our cue to exit. NFLX is up about 7% in the past week, so if you bought NFLX at the time of my original recommendation, you’ll exit the stock with about a 120% gain. Sell NFLX.”
Analyst Earnings Revisions are a big factor in my Portfolio Grader system. And on Thursday, NFLX investors may have wished they’d heeded that warning. My guess is that a lot of folks “fell in love” with NFLX. But I don’t believe in falling in love with a stock. I’m a numbers guy…and when the numbers turn south, I get out.
In January, we took profits in NVIDIA Corporation (NASDAQ:NVDA) for similar reasons.
NVDA stock is one of my favorites of recent years and had been a top performer for nearly three years. Demand for its graphics chips had skyrocketed – until it stumbled in the third quarter of 2018, when the company fell short of its sales forecasts.
The company guided below expectations as well, which is what really hit the stock.
As the share price grew more volatile and analysts kept lowering their forecasts for NVDA stock, I knew it was time to collect our winnings. So, in Accelerated Profits, we closed our position on a bounce for a whopping 166% profit.
Now, a “sell” in our short-term system does not mean that a stock is a bad long-term investment. It very well could be a great long-term investment.
But to generate consistent short-term profits, we’ve found that a decline in fundamental indicators is a clear sign to move on, take profits, and focus on stocks with superior ratings.
Our system is very picky. It demands excellence from stocks. We don’t let our money sit in a stock with declining ratings when we know it can be deployed into stronger stocks. After all, I believe our money deserves the very best, and you deserve the very best, too.
