Whenever I instruct younger people about how to invest, or trade, I always say, "go for the easy money, not the hard money, no matter how difficult it is to stay away."
Netflix (NFLX) just became hard money.
On a day where we saw earnings-derived moves taking the market all over the place, it is important to detect the crucial changes that occur within a stock and how it can impact a host of other stocks, perhaps wrongly, as portfolio managers flail and try to wrestle with a consistent story that's suddenly erratic. This is now the story of Netflix.
Look, we all know the story of Netflix, the ultimate cord-cutting company that uses a lot of older licensed talent to bring you in and then gives you homemade brilliance. Sometimes the homemade brilliance is so incredible that, like "Stranger Things," it can bring people in itself.
By this point everyone knows that the company didn't grow subscribers at all -- it actually lost some. When it predicted that it would sign up 5 million subs, it got only 2.7 million. That's the first time we have seen a down quarter in a dozen, digital-streaming years. Sales were weak all over the place, but the only figure I care about is that sign-ups were particularly weak where there were price increases, typically of 13% to 18%.
In one fell swoop, Netflix went from easy money to hard money. In one quarter we went from being sanguine to be skeptical, skeptical to the point that even down nearly 40 points, I am not certain I can tell you it is fine.
Why? Because I was wrong about something. I felt that the product, the movies, the shows, the binging, they were all bargains. The whole thing is a blast vs. going to the theater. I have my candy bought at Dollar Tree (DLTR) , of course, we can crack open a beer, we can stop and munch, whatever. At our own house. We can stay up all night as we have for so many of Netflix's shows, "Stranger Things," "Orange is the New Black," "Fauda."
The one thing we never thought of was price, that anyone would resist an increase and that's what seems to have happened here.
That means I have to take it out of the bin of consistency, which I will pay up for, and put it in the bin of the episodic, and even dare I say, dispensable.
You see, until last night, Netflix was my go-to for entertainment, meaning I haven't looked at my bill in years. I have no idea what I pay. I have my picture up when it asks me who is watching. In preparation for interviewing the brilliant CEO Reed Hastings, I called customer service at 2:30 in the morning and asked a question about what was my best bet for a movie about the Russians going from Stalingrad to Berlin to end the war in the East, and a very nice woman told me to watch a movie actually directed by Stalin!
I mean I will pay double what I pay, Reed.
But it tuns out that there is price sensitivity.
What does that mean? It means that I no longer think it is like Costco, to which I pay to be a member without hesitation, or Amazon (AMZN) Prime or Apple (AAPL) services or Spotify (SPOT) .
So that means I can't figure out what's the right price to pay. I would be just guessing. I can't guess. Netflix has just gone hard money.
I've got another one. For the longest time the easiest money in pharma was Johnson & Johnson (JNJ) . Best pipeline. Best management. Best balance sheet. Terrific growth in actual pharmaceuticals. You are not going to get a better CEO than Alex Gorsky.
Suddenly, however, it's gotten to be hard money. The other day, it reported an excellent quarter. At the exact same day there was an article in the paper about how they may be on the hook for billions of dollars in opioid responsibilities. Teenagers. The sick. The unfortunate. The lawyers make it as if JNJ preyed on these people. Oklahoma authorities went after JNJ and two other companies for polluting the minds and bodies of people with opiates. The other two, which I think were actually guilty of doing exactly what the authorities said if not more, settled. JNJ did the least. Go look at their defenses. I think JNJ did nothing wrong and they were the smallest player. But now every minute my charitable trust owns this stock I shudder and worry. And this opioid verdict, one of what could be a nationwide epidemic of suits that comes on top of some big losses in what I think is another baseless case -- that JNJ knowingly sold talc that had asbestos that can cause cancer.
I have, again, read the pleadings, done hour-after-hour-after-hour of homework and interviewed Alex Gorsky about it. I am 100% convinced of their innocence. But there's cases all over the place, and it's become a dangerous whack-a-mole story. My trust sold some in the forties, because of these worries and now it's all the back to $131 and I don't want to buy it back for the trust until it's in the $120s, where it might be de-risked. But the easy money in pharma right now is in Novartis (NVS) , which reported a fantastic quarter, amazing guidance and no controversy.
We saw two stories yesterday and today that exemplify this. CSX Corp. (CSX) , the gigantic railroad in the east reported a disappointing quarter where the CEO was baffled by the economy. The stock got crushed. But Lance Fritz, the CEO of Union Pacific (UNP) , came on our air today and not only was he not baffled, he told you how well he is doing in this economy and if we get some trade deals he could hit the ball out of the park. One's a train wreck of hard money, the other is all aboard with easy money.
Now you may think that I am being a chicken, that the real reward goes to the bold and the brave, the ones who are willing to wade into Netflix right here and make a stand or decide that JNJ will win all of its cases and CSX has figured out what went wrong and his CEO is no longer puzzled about the environment.
I am telling you, through many years of experience, that is wrong. Right now, because Costco will be able to raise prices for its cards, I can tell you that its stock is cheaper than Netflix. Novartis, at an all time high with an 18 price-to-earnings multiple, is a better value than JNJ. And CSX vs. Union Pacific? Are you kidding me?
You need to know that being a hero is a silly way to invest. If you think that Netflix has fixed its problems, because the first few weeks of this current quarter went well, I think that's terrific. I could even give Reed the benefit of the doubt, that's how brilliant he is. I bet the next shows will be better than the last and that the departure of "Friends" and "The Office," two shows that we learned are low-single-digit obsessions, won't even ding them.
But what I didn't know is that some people care about the price of Netflix. Until they don't, and I don't know when that is, Netflix is hard money and hard money's too hard a bargain to drive.
Apple, Amazon and Johnson & Johnson are holdings in Jim Cramer's Action Alerts PLUS member club.
