Netflix Is Still a Buy for Agile Traders

by Sam Collins | October 23, 2013 4:00 am

Netflix (NFLX[1]), the Internet entertainment subscription service, is one of the great growth stories of our time. But there is a time to buy and a time to sell, and yesterday one of the best-known investors of our time decided it was time to sell.

Yet despite the resulting carnage in NFLX stock, the uptrend is still intact — and the stock is still a buy for a snapback rally.

After yesterday’s close, Carl Icahn revealed that he sold 3 million shares, or half, of his holdings in Netflix. His shares, he said, had a cost basis of $58, and so he more than quintupled his original stake. But he said that he still believes the stock to be “significantly undervalued.” He said that it is “one of the great consumer bargains of our time.”

The service, at just $7.95 a month for its streaming video, may be a bargain for subscribers. But at a consensus earnings estimate of $1.52 a share this year and $3.41 next year, the stock at $322 a share is trading at over 94 times forward earnings. And so from a fundamental standpoint, it is not difficult to see why Mr. Icahn exercised his right to sell.

From a technical viewpoint, the stock flashed a dreaded “key reversal day” (KRD) — a strong sell signal. This uncommon chart signal occurs when a stock opens at a new high and then closes the newly opened gap in the same day by closing at a price lower than the prior day’s low. On Monday the stock’s high was $355.42. It closed at $354.99 with an intraday low of $340.10. Yesterday it opened at $387.93, had a high of $389.16, and closed at $322.52 — meeting all of the conditions of a KRD.

1023 nflx buy under
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Chart Key

However, technically the stock is still in a bull market — it hasn’t even violated its intermediate trend line at about $290, despite the extreme volatility. Investors who wish to buy Netflix would be wise to let it settle down despite the probability of a reflex rally.

My buy point for Netflix is between its trend line at $290 and its 50-day moving average at exactly $300, for a trade to $350. A stop-loss should be entered at the Oct. 9 low of $282.

This highly speculative stock is only for the seasoned trader. Holders of NFLX should protect current positions by selling calls, buying puts or engaging in other protective strategies.

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