This Neutral Upgrade Makes Netflix, Inc. (NFLX) Stock a Strong Buy

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From a sell of sorts, to a “neutral” that turned into a strong buy; is Netflix, Inc. (NASDAQ:NFLX) a good purchase for investors? Let’s take a look at the evidence both off and on the price chart, as well a limited-risk options strategy in lieu of trading NFLX stock.

This Neutral Upgrade Makes Netflix, Inc. (NFLX) Stock a Strong BuyWhat Just Happened in NFLX Stock?

The President-Elect’s anti-Silicon-Valley agenda was trumped on the NFLX price chart Tuesday. Shares of Netflix jumped 4.54% after research shop Evercore ISI upgraded the company. The move was also supported by a bit of apparent investor enthusiasm about how Netflix is set to increase its well-received original content.

In total, the post-Donald-Trump-win selling pressure has been effectively neutralized, with Netflix shares right back where they started on Nov. 9. The question now might be is whether NFLX is still a buy following Tuesday’s investor fixation?

Some, like Jeffrey Gundlach of DoubleLine, are squarely in the “no” camp when it comes to Netflix.

Recently the well-respected asset manager warned of a bear market in Netflix and other tech giants due to the Trump administration’s hostile views on net neutrality; difficult immigration policies for skilled, high-tech labor; and Netflix’s top brass being one of the vocal opponents of Trump.

Interestingly enough, Evercore analysts aren’t altogether fans of NFLX either. The firm’s upgrade from “sell” to “neutral” and price target of $111 compared to a current share price of $124.57 speak for themselves.

The firm did bow to or acknowledge Netflix’s continued competitive position in the streaming video services market. However, ongoing and increasingly heavy spending on content to maintain the company’s dominance has resulted in steep valuations and Tuesday’s less-than-persuasive upgrade.

NFLX Stock Technical Assessment

12-06-16-nflx-weekly-stock-chart
Source: Charts by TradingView

On the price chart, NFLX has established a very large corrective move since hitting its all-time-high of $133.27 one year ago. Many growth traders will recognize the pattern as a cup-shaped base that’s now working on a handle to complete the formation.

The handle’s development thus far has reinforced the base’s bullish underpinnings as support was found off a slightly blemished April “W” pivot. As well, the handle maintained its price structure above the 62% retracement level, which is typically a bullish sign of underlying strength.

If NFLX stock moves through October’s pivot high of $129.29 on above-average volume, a breakout will trigger on the price chart. The well-watched signal may have the benefit of momentum chasers and likely, some of NFLX’s 7% short interest helping push shares even higher.

NFLX Bullish Vertical Call Spread

In reviewing the NFLX options board, the weeklys Dec $125/$130 bull call spread is attractive.

Priced for $1.80 with shares near $125, the vertical requires a move less than 2% to break even at expiration. An actual breakout of NFLX’s handle and about 0.50% of follow-through above $130 would turn a profit of $3.20, or return in excess of 175%.

Aside from the vertical’s benefits if shares of Netflix rally modestly, the spread’s cost, which amounts to roughly 1.5% of NFLX stock, is also appealing as it effectively limits risk.

The downside with this NFLX spread is the calendar. Ultimately, there isn’t a lot of time to see the desired outcome pan out. However, in not wanting to get involved with Inauguration Day follies or Netflix’s earnings in January and also cautious on NFLX’s rich valuation, this looks like a reasonable way to participate in a short-term rally.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/netflix-inc-nflx-stock-strong-buy/.

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