Keeping it Real, Keeping it Rational

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

Stop chasing the trends.  Chances are you’re not quick enough, or informed enough to get in on the action.  Relax, I feel your pain.  It’s hard to feel like the kid on the playground that gets picked last for the dodge ball team every week.  Take Netflix (NASDAQ: NFLX) for example, before last week this stock was dead, buried, and a painful memory for most investors after its unprecedented decline in the latter months of 2011.  Then, all of a sudden Netflix shocks everyone with its announcement of huge 4th quarter revenue growth and it’s off to the races, by the time you realize what’s happening you missed your entry point and once again you’re hanging from the monkey bars wondering where you went wrong.  There’s nothing worse than feeling like you missed an opportunity to hit a homerun.  If that’s not enough, here’s another one, Apple Inc. (NASDAQ: AAPL).  After the hugely successful release of the iPhone 4 in the summer of 2010, it was obvious that Apple was the clear victor in the battle for market share in the mobile device industry.  Just when you think share prices have topped out, Apple releases the iPhone 4S and the stock soars to record setting levels.  There you are on the monkey bars again wearing a sad face.

The important truth to understand is this:  when the bulls enter the market, rational behavior ceases.  Let’s take a closer look at Netflix recent surge.  The company reports better than expected revenue growth in the 4th quarter and everyone loses their minds trying to get behind the stock.  If you take a moment to consider the fundamentals you would have to ask the question, what is different about Netflix this time around?  The answer is nothing.  Basically, they are still paying through the nose for streaming rights for their digital content and until they can find a way to liberate themselves from the pricing power leveraged against them for these rights they will have a hard time achieving real long term profitability. 

In addition, they are going to have a formidable adversary in companies like Hulu LLC who offer similar services to customers looking to catch up on their favorite TV shows.  Amazon.com is also making strides in its development of a competitive video streaming service that will be available on the Kindle Fire. 

I also see Apple moving into this space as they work the kinks out of Apple TV.  Over time, market share will become increasingly hard to acquire and the battle will be decided by who can do it cheaper.  In any case the prognosis doesn’t look good for Netflix; nonetheless, the bulls are all in….again.

Here’s the call to action, and your chance to come off the monkey bars and get in the game.  Why buy the milk when you can own the cow?  Here’s the plan, if you want to capitalize on the digital streaming craze why not buy Disney, they hold the assets, set the price, and ultimately reap the benefits of a consistent source of cash flow in Netflix through licensing rights.  As for Apple, think economies of scale.  Simply put, Apple sells a lot of iPhones and iPads, 47.8 million and 22.9 million last quarter to be exact.  Looking a little further down the production pipeline we find chip maker Qualcomm.  Qualcomm has done quite well for itself with the success of the mobile industry and they are probably the company best positioned to meet Apples growing supply needs in the future.

So what can you do to avoid being trampled by the bulls?  Easy, don’t run with them. 


SofJay has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Apple, Netflix, Qualcomm, and Walt Disney. 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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