Image Source: Esther Vargas
We’re adding protection to the newsletter portfolios and finally making a move on Netflix.
By Brian Nelson, CFA
Nothing should be alarming in this note. We’ve talked about our concerns about the broader stock market for some time now, and how we think we’re in a bubble. One has to look no further than the very intro to the May edition of the Best Ideas Newsletter here (pdf), released Monday, for example, or our continued reminder of how markets perform during periods of contractionary monetary policy. Of course we’re still content with riding the market higher–should it go in that direction, perhaps on the backs of incremental index investors and dividend growth re-investors–but we’re also being as prudent as optimistic. As a result, we’re making a couple moves today in the newsletter portfolios.
First, it should be no surprise that we continue to believe market valuations are far from attractive. Forward earnings multiples on the S&P 500 (SPY) are quite lofty relative to historical averages, and we’re skeptical that future growth will be able to justify them. As I often say, valuations don’t matter until they do, and sometimes valuations can act as their own catalyst. Need something more tangible? Well, today, we’re starting to see some cracks in the foundation of the “Trump trade” optimism, as skepticism about the President’s ability to execute on plans for corporate tax reform has started to build. We’ve held the opinion that corporate tax reform will be no easy task to achieve, by anyone, and the market finally seems to be catching on. Fiscal 2018 consensus numbers are at risk, in our view.
Today, we’re not doing anything special, but we are adding protection to both newsletter portfolios in the form of put options on the S&P 500. We’re also finally stepping up to the plate on our call on Netflix (NFLX) after these many months of expecting a share-price collapse. We’ve watched Netflix’s stock go up and up and up since we first highlighted our take, and now we’re finally ready to bet on convergence to intrinsic value, thankfully with an even better entry point. Opportunistically, we’ll be adding put options on Netflix to the Best Ideas Newsletter portfolio. Of course, just a reminder, buying put options can result in the complete loss of the investment (premium), and option investing is not for everyone. These ideas fit well within the newsletter portfolio context at the moment, in my opinion, but they may not be right for you. Always be sure to seek professional help with your personal financial advisor.
Lastly, for those that may think the market is heading south, I invite you to consider the monthly Nelson Exclusive publication, a subscription to which also grants you access to our report archives where our theses on many short idea considerations can be accessed! Subscribe to the Nelson Exclusive here.
Summary
Best Ideas Newsletter portfolio
Put Options – added 5, Aug 18, 2017, contracts on NFLX, $125 strike for $1.52 each. Total = $760, excluding commissions.
Put options – added 2, Aug 18, 2017, contracts on SPY, $237 strike for $5.45 each. Total = $1,090, excluding commissions.
Dividend Growth Newsletter portfolio
Put options – added 2, Aug 18, 2017, contracts on SPY, $237 strike for $5.45 each. Total = $1,090, excluding commissions.