Contrarian Ideas: NFLX and LNKD

Bernie Schaeffer of Schaeffer’s Research has recently added Netflix (NFLX) and LinkedIn (LNKD) to his fund’s portfolio. His strategy is “based on a combination of fundamental, technical, and contrarian-based sentiment metrics.” (via TheStockAdvisors.com)

Both Netflix and LinkedIn have been the focus of negative sentiment regarding present and future earnings estimates. 

Investment Underground believes that LinkedIn, the recently-public professional social network, is overvalued by its 1200 Price-Earnings (P/E) ratio (via SeekingAlpha). 

Miriam Gottfried of Barron’s is similarly suspicious of LinkedIn’s valuation. According to her calculations, shares are trading at 328 times expected 2012 earnings.

“LinkedIn is a business with plenty of potential, but its valuation has gotten way ahead of even its fast-growing revenue,” Gottfried writes.

She compares LinkedIn to Monster Worldwide, an online classified ads site. Monster is less than a fifth as large as LinkedIn but genereates $1B in annual revenue compared to $417M of expected revenue for LinkedIn this year.

Barron’s has also cautioned about a possible social-networking bubble. Ilaina Jonas writes that companies like Faceboook, Groupon, Zynga, Twitter, LinkedIn, and Pandora could be between 20 and 100 per cent overvalued (via Reuters).

Like LinkedIn, Netflix has received a deluge of negative analysis regarding its valuation. 

The Unintelligible Investor explains in a SeekingAlpha post how the online and in-mail movie rental company has relatively small earnings figures that have been blown out of proportion. By his calculations, even reasonably rapid growth would not dramatically increase earnings at the company in large part because they would almost necessarily entail rising content costs (ie, licensicing fees paid to movie distribution firms). Netflix’ recent 60% price hike is early evidence suggesting that the company might be squeezed by the studios.

As a result, both Netflix and LinkedIn have sizable short floats, a sign that sophisticated investors are betting against the future fortunes of the two companies. 20 per cent of Netflix shares and 37 per cent of LinkedIn share are sold short, writes Schaeffer

Schaeffer believes that these large short floats could turn into significant short covering if the upward price trends for the two stocks continue. A short covering rally could provide “tailwind for the shares” — in other words, possibly amplifying price gains, which could make an investment in either or both of these stocks quite lucrative.

Interested in further pursuing this contrarian idea? Start by analysing these companies using the Kapitall tools included below.

Over the last month, Netflix lagged the overall market (as represented by the S&P 500 index). LinkedIn, on the other hand, outperformed the broad benchmark.

NOW WATCH: Tech Insider videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.