Market Health

Is It Time to Press Pause on This Stay-at-Home Play?

This year has felt like decades crammed into a handful of months.

In the future, whole chapters of history textbooks will be dedicated to what happened in 2020. And so far, we’re only six months in!

It’s hard to believe that a mere 78 days ago, the S&P 500 was down more than 30% for 2020… that the markets suffered the fastest – though easiest to tame – bear market decline in history.

And now, after a furious, V-shaped recovery, the S&P is a hair’s breadth away from being positive for the year.

Already, the Nasdaq is up more than 10% year to date.

And a big driver for both indexes has been one of the clear winners of the pandemic and its stay-at-home economy: Netflix (Nasdaq: NFLX)…

Netflix vs. S&P 500 and Nasdaq

The video streaming service ended 2019 as the best-performing stock of the last decade. And it’s continued to be a breadwinner for investors in 2020, setting new all-time highs and charging nearly 30% for the year.

But now the tide is turning. And if history is any guide, Netflix’s rosy run could be ending… at least for now.

Avoid This Glaring Omission

Over the years, I’ve developed a number of strategies that go against Wall Street norms.

One of those is to target seasonal trading trends.

These are predictable patterns each year that investors can profit from over and over again.

And part of that strategy focuses on understanding how shares of companies tend to move on earnings.

Now, skeptics will view this as immaterial or lacking insight. But I disagree. And if you’re an options trader, this is actually information you can’t afford to ignore.

Traditionally, most analysts look at earnings in a linear fashion.

You’ll hear something like “Netflix has beaten the earnings consensus three of the past four quarters.” And you can find charts like this all over the financial news…

Netflix EPS - Last Four Quarters

But in reality, that doesn’t tell you how investors reacted to the results. So the information isn’t complete.

In fact, there’s a glaring omission.

I take a different approach. I use one that creates a more honest representation of the company’s performance and is far more telling of its business and how investors feel about it.

I look at earnings in a vertical fashion.

I focus on the one-day move of shares on each report.

I want to see how a company’s shares have moved on every first, second, third and fourth quarter report.

To illustrate what I mean, let’s look at a table of the one-day moves of Netflix shares on each quarterly earnings release since 2009…

Netflix One-Day Moves on Earnings

This gives me a clearer picture of what to expect for earnings in an apples-to-apples comparison.

I can see fourth quarter earnings have been prone to big, one-day pops. Whereas first and third quarter reactions are a coin flip.

More importantly, I can see second quarter results tend to suffer big one-day drops. In fact, they’ve risen only twice on this report since 2009. And that report is on the horizon now.

“This Year Is Different!”

I love consistency and predictability in my investments and trades.

And that’s why I love seasonal trading.

There is comfort in the ebbs and flows.

Now, you might say, “Video streaming doesn’t have seasonality.” And if you looked at a revenue chart for Netflix, you would see a steady incline from quarter to quarter.

But Netflix shares have some wildly exceptional months and some not-so-great ones.

Just look at how the company’s shares have performed in January since they began trading…

Netflix Shares - Average Monthly Gain

Would you expect that in one month alone shares are gaining an average of 18.3%?

That’s largely thanks to those big moves on fourth quarter earnings.

We can also see July has been the lone bruise each year for Netflix shares. And that’s due to the response to second quarter results. For years investors have consistently reacted negatively to this report.

But this year – likely because of the pandemic – expectations are heightened even further.

In the first quarter, Netflix demolished subscriber number expectations. It reported global additions of 15.8 million – more than double its guidance of 7 million and nearly double the 8 million analysts expected.

Yet shares still fell.

With reopenings underway, subscriber numbers aren’t going to improve going forward. Especially during a quarterly report when Netflix has historically failed to impress.

That means this is a “stay-at-home economy” play investors might want to press pause on.

The seasonal trend in shares is flashing a warning sign, and the catalyst for its first quarter bump in subscribers is winding to a close.

From my perspective, the greatest stock of the past decade is on hold… at least for now.

Here’s to high returns,

Matthew