THE BOTTOM LINE: Unstoppable Netflix, red-hot banks, and talking shop with a $6 trillion investment chief

This week:

  • Business Insider CEO Henry Blodget looks at Netflix following the company’s earnings report, which saw the stock surging to a new high. He discusses the main thesis of Netflix, which is that it’s a modern TV network, and points out that most of the company’s growth is coming from overseas. Blodget reminds CEOs that it’s not imperative to just maximise profits — that it’s OK to reinvest in your own business and still be rewarded in the stock market. In terms of Netflix’s future valuation, he says that the company will need $US7 billion to $US8 billion of EBITDA and trade at 15-20x to support a $US100 billion market cap.
  • Business Insider executive editor Sara Silverstein points out that Netflix just increased its prices, but still has more room to raise them in the future. Blodget agrees in the company’s untapped pricing power, and then Silverstein points out that it still has great merchandising potential. In terms of how big the company can get, Blodget again highlights just how far the company has to go on an EBITDA basis to achieve the $US300 billion valuation floated by NYU professor and author Scott Galloway on last week’s show.
  • Silverstein breaks down the red-hot quarterly earnings reports turned in by the biggest Wall Street banks, and while their stocks weren’t immediately boosted as one might expect, traders are pricing in future strength.
  • In the Fidelity Insight of the Week, Silverstein outlines a note from fund manager Matthew Fruhan, whose large-cap stock fund has been significantly overweight the financial sector over the last few years. Fruhan said that the sector was out of favour for a while because the market undervalued the earnings potential of many banks, but that they have since recovered.
  • Silverstein speaks with Richard Turnill, the global chief investment strategist at BlackRock, who’s bullish on risk assets right now. She asks him about valuations, which many people say are extended at the moment. He says that people are too concerned about that, and argues that the prices in many areas of the stock market are reasonable. Turnill does concede that the US market looks expensive relative to its international counterparts, where BlackRock sees more upside. He stresses, however, that there’s still plenty of opportunity in the US, with the economic environment looking attractive and the Fed raising rates gradually. Turnill says that BlackRock favours tech and financial stocks, while pointing out that defensive bond proxies like consumer discretionary will struggle to keep up in a rising-rate environment.
  • Turnill says that a big risk to the market is a policy mistake by the Fed, although he thinks such a slip-up would be highly unlikely, considering how well the central bank has signalled past moves. He predicts that the Fed will hike more than twice before the end of 2018, which is at a higher frequency than is currently priced into markets.
  • Turnill weighs in on the low-volatility environment, and says that it has some people too bearish on the market. He points out that if an investor sold in the past during a low-volatility periods, they missed out on big gains. Because of this low volatility, Turnill recommends buying dips in the market. He also argues that the lack of price swings largely reflects stable economic conditions.
  • Turnill says we’re in the middle of a very large expansion right now, which he says is one of the slowest in history. He points out that recessions don’t start on a clock, and that cycles should be measured based on excesses building up in the economy. As such, he sees the next recession possibly being years away, with very few signs of leverage being overstretched.
  • Silverstein asks Turnill about smart beta factors — or investment strategies based on a specific style. He says that factor investing can drive excess returns over time, and says that BlackRock favours fairly-priced momentum stocks, which are spread across several sectors. He also likes value stocks, which he says do well during a period of economic growth. One area that Turnill says he doesn’t favour is small caps stocks, which he says are pricing in a lot of hope around corporate tax cuts. He prefers emerging markets, where stocks have more favourable valuations.
  • Turnill says that while he thinks blockchain technology will be adopted more over time, but that doesn’t mean that cryptocurrencies should keep going higher and higher. He says they show a lot of the characteristics of a bubble. Lastly, he argues that bitcoin has no fair value right now, which is why he doesn’t own it.
  • Blodget breaks down Jack Ma’s latest musical endeavour. While the Alibaba CEO has previously been spotted dancing at company meetings, he recently appeared at a music festival and sang a few songs for the crowd of thousands.

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