Who is crazy enough to recommend selling Netflix Inc. (Nasdaq: NFLX) during a stay-at-home pandemic?
I recommend selling. But I’m not crazy.
See, my analysis shows that, despite all the binge-watching that’s taking place right now, Netflix’s stock is set to fall 14% by June.
Netflix is a video streaming service that offers feature films, documentaries and TV shows. The company put subscription-based streaming on the map.
With the world on lockdown, people have more time at home to watch Netflix.
As a result, investors drove Netflix’s stock to a new high. It rebounded 48% after it bottomed with the broad market in March.
But a look at the stock’s chart tells me that now’s the time to sell. A double-digit decline in the stock can make us 124% by June.
Shares Set to Fall 14%
Take a look at this chart of NFLX stock in 2020:
The black line is the price of Netflix.
The red A-B-C pattern denotes the Apex Movement Pattern I expect the price to track.
I use these patterns to predict price trends. It’s the framework for my Apex Movement Patterns (AMPs).
Basic emotions drive prices. AMPs help me identify when investors switch from fear to greed — and vice versa.
As I write this, Netflix trades around $434. I expect a 14% decline to $374 per share by June.
And that’s not all.
NFLX stock is overvalued.
Its price-to-earnings (P/E) ratio of 85 is more than three times the industry average.
The pandemic boosted Netflix’s first-quarter earnings, which it reported on April 21. And it still boasts the largest subscriber count of any streaming service.
But competition is heating up. In addition to Hulu, Amazon Prime and Apple TV+, Disney+ is hitting its stride with exclusive rights to Star Wars and the Marvel Cinematic Universe.
NBCUniversal plans to launch its Peacock streaming service in July.
If the historic unemployment continues, consumers will trim unnecessary expenses — such as their Netflix subscriptions.
And when the economy begins to open back up, will Netflix be able to bring on new accounts when people have less time to watch — at a pace that investors can justify buying an overvalued stock?
Finally, my Apex Profit system’s proprietary momentum indicator tells me demand for this stock has slowed. And now is the time to bet NFLX will decline.
Your Trade Setup
To benefit from the downside in Netflix, you can buy a put option. The value of the put will rise as the stock declines.
Since the expected move is less than two months, we can use the June 19, 2020, expiration date to take advantage of it.
With the stock trading around $434, we can buy the $435 strike price for around $25.
Keep in mind that the price you pay is per share of the stock, and one options contract controls 100 shares. So if one contract trades at $25, you’ll pay around $2,500 — the price of about six shares of Netflix stock.
That gets you in a position to double your money as the stock price moves toward $375 a share over the next couple of months.
Since this is a bonus opportunity, we won’t be updating you on what action to take next. A good rule of thumb is to set a limit order to sell half at whatever would net you a 50% gain.
For example, if you buy two put options for $25, you can set a limit order to sell one at $42.50 — then let the rest ride to a double-digit profit.
And be sure to sell the remaining half before the option’s expiration date.
But you’ll also want to watch your downside risk. Look to preserve capital if it falls below a 50% loss.
Here’s a table with the trade setup:
Reach out to us at winninginvestor@banyanhill.com with questions or feedback!
Regards,
Editor, Apex Profit Alert
P.S. I hope you’ve been able to take advantage of some of our free options trades!
I use the same proprietary indicators in my Apex Profit Alert system. And it’s been issuing “buy” signals left and right. Just Wednesday, I recommended three new trades!
For more about my system, check out this presentation.