Wall Street Analysts Should Share Blame for Netflix, Tech Sector Weakness

When the Fed was throwing money at the market, everyone was an “investing genius” because all you had to do was buy shares and momentum did the leg-work. However, with value investing, there is no momentum or if there is, it’s to the downside.
James Hyerczyk

The major U.S. equity indexes opened the week lower on Monday, adding to last week’s dismal performance. Once again, the weakness was primarily driven by a tech sector sell-off. Losses were spread across the board in various industries.

Last week, rapidly rising interest rates were primarily blamed for the stock market rout. At the start of the week, investors are shedding risk due to concerns over the impact of the U.S.-China trade dispute.

At 1424 GMT, the benchmark S&P 500 Index is trading 2753.71, down 13.42 or -0.48%. The blue chip Dow Jones Industrial Average is at 25284.27, down 55.72 or -0.22% and the tech-driven NASDAQ Composite is trading 7422.28, down 74.61 or -1.00%.

Losses in the technology sector are being led by weakness in Netflix and Apple. Netflix is down more than 2.5 percent after Raymond James cut its price target. Apple shares fell by more than 1.5 percent after Goldman Sachs said the tech giant’s earnings could fall short this year as demand in China slows.

Wall Street Strategy Shifting from Speculative Growth to Value-Investing

A stock investors should be watching this week is Netflix. On Tuesday, the internet entertainment company is scheduled to report earnings after the bell. However, volatility and selling is already hitting the stock after Raymond James and Goldman Sachs slashed their 12-month forecasts for the company.

Raymond James cut its expectation for Netflix stock to $400 a share from $445 a share, saying the streaming company’s growth will slow as interest rates continue to rise.

Goldman Sachs presented a bullish scenario for Netflix for the upcoming quarterly earnings, but it also lowered its “12-month price target from $470 to $430 to reflect the contraction in broader internet multiples.”

Needless to say, the wide range of prices should lead to volatile trading conditions. With both Raymond James and Goldman Sachs still “bullish” on Netflix over the longer-term, lowering the price targets essentially means Wall Street may be shifting from speculating on growth to looking for value.

Citigroup tends to agree with my assessment of the strategy by calling for investors to buy the dip. “We view the recent sell-off as an opportunity to own a high-quality, recurring revenue franchise with attractive upside potential,” Citi said. It also set a share price target on Netflix at $375.

Value Investment More Difficult Than Momentum Trading

When the Fed was throwing money at the market, everyone was an “investing genius” because all you had to do was buy shares and momentum did the leg-work. However, with value investing, there is no momentum or if there is, it’s to the downside.

Investors may find it very difficult to buy a falling stock market especially with all the negative news hitting the headlines. It seems to me that it all comes down to faith in the analyst you want to follow.

Just look at the wide range of guesses for “value” for Netflix. Raymond James is saying it’s worth $400. Goldman Sachs says its value is $430. Citigroup analysts believe in $375. So what is it worth?

Keep an eye on Netflix this week because its price action could be a precursor of what is to follow with several of the major stocks. While not saying “sell” the stock at these inflated levels, Wall Street Analysts are actually implying that Netflix is overvalued. This news could actually encourage investors to dump the stock at current levels, leading to a self-fulfilling prophecy.

You see Wall Street will never tell you to sell an overvalued stock. They’ll just kind of imply that you should stop buying it. This is genius because they really can’t be wrong. However, in doing so, its analysts actually contribute to the stock market sell-off but they’ll keep placing the blame on rising rates, geopolitical events, trade disputes and President Trump’s policies.

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