Are Consumers Riding the Bull?

Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Did you vote in this year’s presidential election? How about the mid-term election? If you’ve continued to read with a sense of shame, fear not. I’m not here to lecture you. In fact, I would like to congratulate you. Believe it or not, you’ve voted nearly every day this year. As a consumers, you have the power to cast “votes” for companies through your daily purchases.

Consumers are the lifeblood of any business, and are the ultimate supplier of a company’s profit. How consumers feel about a certain product or service will govern how and when they spend their money. Recent market gains have carried some stocks above their real value. A simple consumer analysis may foretell a coming correction.

Raging bulls

Recently the market has been on a hot streak. Only a week ago, the Dow Jones closed at just over 15,400, an all-time high. Bullish sentiment hovers around 70%, and with good reason – 2013 has yet to deliver a month of negative returns. As the market approaches new highs, it may be wise to heed a contrarian opinion.

A strong bullish sentiment can easily manipulate stock prices, raising them above their intrinsic values. Long-term investors should be wary of transient, momentum-driven gains, and should instead focus upon the real judges of a company’s value: consumers.

Inflationary tales

Less than a year ago, Blackberry (NASDAQ: BBRY) was trading at around $6. Today it trades near $14. That’s about a 90% increase. For comparison, the market has risen roughly 20% over the same period. It wasn’t long ago that Blackberry abandoned its core consumer: businesses. Looking to revive itself, Blackberry has launched two new phones; this new activity spurred a slight boost in sales figures, and consequently the stock has gone on a run, buoyed by bullish sentiment.

While traders are excited about a comeback, consumers have already decided: Blackberry is dead. In the first quarter of 2013, mobile users once again voted against Blackberry, allowing the Google (NASDAQ: GOOG) / Apple (NASDAQ: AAPL) duopoly to capture nearly 93% of the U.S mobile market.

Apple is slowly losing operating system market share and has lost about 5% since last year. Fortunately, the company has been able to make up the difference with its profitable App Store. The App Store generated $9 billion last year with minimal contributions from Apple itself. Its innovative 30/70 revenue split has developers racing to produce high-quality apps. If profits follow apps, then Apple is in the money.

Google itself is no stranger to innovation. Its inventive Android operating system is the world's most popular by a significant margin. Google's genius doesn't end with software, however. The Nexus 7 tablet has been meet with positive responses from consumers. In 2012, the web giant sold about 4.5 million tablets. It's evident Google knows how to make successful software, and now hardware as well. Blackberry should take note.

Android phones have never been more popular, and with iOS 7 being released later this year, don’t expect Blackberry to cut into this market share anytime soon. Touting dull devices and a lackluster app library containing only 120,000 apps, Blackberry has disappeared from customers' evoked set of phones. Consumers have decided they don’t like Blackberry, and unless you’ve got a short lined up, neither should you.

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If I had a nickel for every time I heard someone complain about the lack of quality content provided by Netflix (NASDAQ: NFLX), I would be a very rich man. In fact, I might be wealthy enough to purchase an Amazon (NASDAQ: AMZN) Prime account. In addition to free two-day shipping, Prime customers receive unlimited streaming to Amazon’s large collection of movies and TV shows. Such a steal of an offer has not been ignored by customers. According to Morningstar, Amazon Prime has ballooned to over 10 million members. A contributing factor to Amazon's 22% year-over-year sales growth. Touting 150,000 TV show and movie titles, Amazon's package offers more content at a lower price. If your one of Amazon's 17 million Kindle Fire owners, you now have an incentive to take your streaming business elsewhere.

To say that consumers hate Netflix would be brash. Netflix is a good company: it consistently has increasing revenues, rising subscriptions, and management that is trying to secure better content. Unfortunately, its $200+ share price is an astronomical valuation. Only a year ago it traded around $60. Consumers like Netflix, but as long as there are competitors with comparable if not better services available, they won’t fall in love. Rebounding from its Qwikster debacle, a bullish outlook has carried this stock to astonishing heights, but don’t be surprised if it soon comes fluttering down.  Like the Netflix-exclusive show, this company's stock may very well be a “house of cards.”

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 For every action, there is an equal and opposite reaction

With the market bolstered to unprecedented heights, the prudent investor would be wise to keep Newton’s third law close to heart. Operating costs, free future cash flows, and gross margins are all traditional gauges of worth, but a consumer’s subjective value is the best metric never used by analysts.

A correction is coming. When it arrives, make sure you’re not riding the coattails of bullish sentiment. Consumer trends are everywhere, and it’s up to you to recognize them. Just for a moment, set aside your technical charts, forget your fundamental ratios, and simply ask yourself: “would I ‘vote’ for this company?”

The tumultuous performance of Netflix shares since the summer of 2011 has caused headaches for many devoted shareholders. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why The Motley Fool has released a premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. The report includes a full year of updates to cover critical new developments, so make sure to click here and claim a copy today.

Article by Joshua Sauer, edited by Chris Marasco. Chris Marasco is ADifferentAngle's Editor-in-Chief.  Neither has a position in any stocks mentioned. The Motley Fool recommends, Apple, Google, and Netflix. The Motley Fool owns shares of, Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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