If you read my column, you know the FANG stocks make me nervous. I don’t like high-flying, momentum-driven stocks because I got toasted when the dot-com bubble burst in 2000. So, while I hate missing out on much of the run-up in these stocks, I have captured bits of upside while trying to limit risk. That includes stocks like Netflix, Inc. (NASDAQ:NFLX).
Does Netflix Stock Belong in Your Portfolio?
Now, I happen to an investor with a lot of experience who just doesn’t like stocks that trade far higher than any valuation method could justify, but that may not reflect the kind of investor you are.
Which leads to the question of whether or not Netflix stock belongs in your portfolio. There’s no one-size-fits-all answer because every investor is different. What I can do is offer guidance as to what buying or holding Netflix stock may mean to you.
Analyzing the Risks and Rewards
Ultimately, the construction of any portfolio depends on how much risk you are comfortable with. The problem with chasing performance is that performance means nothing in a vacuum. It goes hand-in-hand with risk and most people don’t know how to measure risk.
Ideally, you are constructing a long-term diversified portfolio that aims to deliver a real rate of return that exceeds the real rate of inflation, with a standard deviation that is no more than 85% of your targeted rate of return. This is what my stock and options advisory newsletter, The Liberty Portfolio, aims to do.
Where might Netflix stock fit in a portfolio?
It is one of riskiest stocks in the market, with extremely high volatility, trading more on momentum and illusion than reasoned valuation. So if you don’t own it and are considering adding it, be forewarned that even as the stock continues to surge higher, it is the equivalent of stretching a rubber band far past the point you should. It will snap; it will smack you in the face. The question is how much can you milk out of it before then and, after it snaps, how far will it fall and will it recover?
How to Trade Netflix Stock
So, if you want Netflix stock as part of a long-term portfolio, don’t allocate a large percentage of your capital to it. Keep your investment small. I wouldn’t even consider it a large-cap growth holding. I would consider it speculative at this point. If you truly intend to hold for ten years or longer, buy it and literally forget about it.
If you want to milk it for short term gains, then buy it, and set a stop-loss of 7 -10% (or whatever you can handle), and make it a trailing stop-loss, so the stop moves higher as the stock moves higher, but not lower as the stock moves lower.
If you already hold it and have gains, I would suggest a series of stop-losses. For example, set four stops amounting to 25% of your position at intervals you are comfortable with, to protect your gains.
One way that I have taken advantage of the ride up is by selling naked puts. I’ll give more examples later, but this involves selling the right for another investor to sell you Netflix stock at a given price on or before a given date.
You receive money in exchange for selling this contract. You may have Netflix stock sold to you, but you will have received money for this, lowering the effective purchase price, and you can either hold or sell Netflix stock once put to you.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.