Wall Street had a high volatility moment going into Wednesday’s market open. The indices stumbled hard and there were wild gyrations everywhere. Investors panicked over no particular reason. When markets spook, I look for opportunities, and today it’s streaming stocks.
The headlines for the ruckus yesterday pointed fingers at Tesla (NASDAQ:TSLA) and its CEO Elon Musk. In reality, the charts suggested these levels to be pivotal. Whatever headlines came out didn’t cause new price paths to develop. They merely expedited the moves and perhaps exaggerated them a bit. It is best to stick to facts. There is too much money in the economy for stocks to crash into oblivion.
Catching falling knives is a simple process if we stick to trading worthy tickers. I avoid going down the quality tree of the industries that I pursue. My choices today will be obvious because they are giant leaders. But before we can take new investments, we have to make sure they work within the overall market.
Regardless of how good my thesis is on a particular stock, it won’t work if the indices are correcting. Even after the recent volatility, the Dow is only nine days away from its all-time high. The weekly charts still are very steep rising wedges. This makes them vulnerable to more downside. We’ve only had two red candles after a slew of green ones.
Since this is it is not necessarily “the” bottom for anything, conviction for all three streaming stocks today is medium. The three streaming stocks of choice are:
Streaming Stocks: Netflix (NFLX)
It’s only fair to start with Netflix, the one that launched it all. I remember when the business was mailing DVDs. At that time I hadn’t even switched from analog tapes. Then at the speed of light, now I have already cut the cord with cable. In my household we stream everything, including Netflix.
So far, investors are rewarding it for being the first mover in the segment. They spent billions against heavy criticism to establish the market. Management severed strong relationships with excellent content companies to bet on their own. Those are gutsy moves that prove the leadership quality. This should give investors confidence to buy dips in NFLX stock.
It is now almost 20% below its all-time highs in January. It is not a secret that it moves fast in both directions. And for the last 10 months, it has see-sawed inside a giant range. We now have clear limit parameters to guide our decisions. It is currently testing the lower edge of this range and my assumption is that it will hold. But if last week’s low fails, NFLX stock could have another correction.
The bulls have the opportunity to bounce 10% and close the gap near $540 per share. Both edges of this range have wiggle room, especially the support side. The buyers have stepped in consistently but not at a very specific hard line in the sand. They broke out last June from $460 and haven’t lost it since. The support zone below current prices in NFLX is just that – a cushion not one line. If the markets correct, they can tip it over and launch a bearish pattern. That will also be an opportunity to add longs.
Investors who want a margin of safety can use the options markets. There they can sell puts lower to be long now but from a lower entry point. In the long run, if the stock market is higher, I expect Netflix stock to also be profitable. Management grew revenues 120% in four years. Meanwhile, current investors are realistic with their expectations. It’s price-to-sales is only 8.4 and it’s P/E is under 60. This is an astonishing accomplishment for a company that spends so much on its content. These metrics are in line with Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT).
There isn’t a soul on the planet that doesn’t know the House of Mouse. Until the novel coronavirus hit, Disney was the ultimate “crowd” company. Its profits depended heavily on people stacking shoulder to shoulder.
And then the pandemic struck and we closed all the theaters and parks. People received orders to stay apart. Here we are a year later and somehow DIS revenues have barely suffered. The big difference happened on its bottom line. But that is a problem they can fix quickly as life normalizes.
Big credit to its continuing success goes to how quickly they embraced the streaming model. They are catching up quickly to the other leaders, and I bet will pass them soon. Disney + will be a default babysitter for billions of families around the world. They have the strongest content as the perfect lure. They also continue to produce excellent franchises. With the streaming option, they now have the opportunity to deliver them directly to consumers.
This is the picture-perfect definition of potential. Dips in DIS stock are definitely buying opportunities. Nevertheless, I feel the need to reiterate the same caveats I had for Netflix. It must hold its prior support levels otherwise it could trigger new bearish patterns. Disney’s last solid bounce was at $160 per share. For now, my assumption is that it will hold, else it will trigger a drop to $140. Almost two months ago, I laid out this mini correction scenario. This is not a blindside drop.
I am confident owning shares at these levels, so lower would also be OK. If the disaster scenario unfolds, Disney stock is a strong buy. Management has proven itself worthy of some credit in my book. The reopening process will help relieve pressure on its profit margins.
Streaming Stocks: Amazon (AMZN)
Streaming is not the prime topic – pardon the pun – when debating Amazon stock. In reality, it is a fierce competitor in the field. There isn’t much AMZN doesn’t dominate. Once they gain traction in a venture they become leaders in the segment. The AMZN prime streaming app is doing great. They now have 200 million streamers, which is more than DIS.
I can attest to the content draw because it’s the main thing I enjoy these days. They have a bit of everything and it feels like I found a hidden gem. Recently, we saw headlines of Amazon potentially buying an age-old Hollywood studio. I don’t usually chase rumors but that would be more confirmation of their commitment.
Streaming or not, AMZN stock stands on its own even if they shut this division down. The company grew its bottom line 10-fold in four years. There is no need to follow with any other arguments to convince investors of the opportunity. Therefore, it comes down to timing and that’s the only variable for new entrants. About a month ago, I put AMZN stock on my shopping list.
Since last summer AMZN stock has traded inside a 600-point range. It is now in the middle of it so there isn’t a specific trigger to buy it. It will go by way of the whole market. Short term the indices are a bit shaky because of early “taper” concerns. Inflation reports were too hot for comfort. Yesterday’s FOMC meeting minutes added to those fears. It is silly for the patient to be sad to lose medicine. It’s a sign that they are healthy again. This means that the market dips will be temporary and would create AMZN stock opportunities in the process.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.