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July 31, 2019

Earnings Preview, July 30-August 1: Shopify And More

Netflix (NFLX: $362, down 3% earlier this week) disappointed last night and the stock's precipitous overnight decline provides us with a different kind of wake-up call. Whether you're in Netflix or not, you're going to want to read this flash.

On the surface, Netflix delivered a quarter almost entirely in line with what investors told themselves they wanted to see. Revenue of $4.92 billion was only 0.1% below guidance and reflects healthy 26% year-over-year improvement. Even quarter-to-quarter, the company squeezed 9% more cash out of its subscribers than it did three months ago.

Furthermore, despite profit being a lower priority while management invests vast amounts in original content, it was nice to see that Netflix carried $0.60 per share across the bottom line, $0.04 better than we expected.

But the market found fault as Netflix missed its subscriber growth target, losing 126,000 paid U.S. accounts and only adding 2.83 million new viewers overseas. Management told us to expect the audience to grow by an even 5 million accounts, so it's a clear disappointment.

There are some compensating factors like the way revenue hit guidance. Netflix raised prices in many markets and this is apparently where the pain point is. We know that now. Furthermore, management has doubled down on its aggressive growth forecasts and now expects subscriber adds to accelerate again in the current quarter.

We've had it with Netflix. We've warned throughout that it's going to be a volatile ride. The stock is now down 20% since we started covering it this time around, after making 65% back in 2016-17. We're worried about competitors like Disney and Apple starting to crowd into the space. With a negative $3.5 billion of free cash flow this year and next, we'd rather be invested in a company that actually makes money. We hereby remove Netflix from our High Tech portfolio. We added them on July 16th last year. We're gone now on July 18th, 2019.

However, even for a volatile stock, the reaction to so-so numbers was so extreme that we now suspect that the market as a whole is getting overheated. It's not Netflix. It's Wall Street. And an overheated market can lurch lower as fast as it soars. Even counting the stocks that fizzled and left our list under a cloud, the BMR universe is up a dramatic 33% YTD. This is a great time to lock in some of that profit before a moody market can take it away.

Is It Time to Take Some Profits?

Why are we asking this question?We can’t predict the future. You may think we can, but we can’t. And we want YOU to think about where YOU are and where you are going with your investments. We have made some amazing stock picks and we’ve made you a lot of money in many of these.  (We’ve had a few losers too.) Roku is now a triple since we added it last year. Shopify is up 350% in two years. Square is another quadruple play. PayPal, Twilio, Paycom, Microsoft, Apple, Visa: all strong performers.

Is it time to take some of that off the table? There are a lot of things to worry about in the world today: Trump, Chinese tariffs, Iran, immigrants, global slowdown, flat earnings for the past quarter and next; negative interest rates in Europe and Japan . . . can they happen here? If so, will the Fed run out of ammunition if short rates go to zero? What about the attacks on Big Tech by Congress and the European Union? Can Facebook, Amazon and Google survive this onslaught? Of course they will, but why sit around with someone hitting you on the head with a hammer. Maybe it’s better to step a little away from the scene.

Lots of questions. No solid answers. Irrational exuberance was proclaimed by Alan Greenspan on December 5, 1996 after an amazing bull run in the preceding few years. But the bull market continued to skyrocket until the Spring of 2000. That’s almost 3½ years after Greenspan’s call. So is it too early to start taking profits now?

Again, we don’t know, but we do know that there are things you can do.  You can sell some calls against your stocks. This brings in cash and cushions you on the downside a bit.  But if Roku, which was at $32 at the start of the year goes from $110 now to $90 or even lower, it’s not going to cushion you much with $5 of call option income. So perhaps you can take some profits off the table. Maybe you should put some stops in place.  Sell some at $104. Sell some shares if it hits $96. Sell some more if it hits $90. Then if it goes to $70, which is a distinct possibility in a nasty bear market, you’ve protected your profits and have cash in the bank.

And don't forget, we’ve got 17 stocks in our High Yield and REIT portfolios that are paying from 3% to 11% dividends. (Be wary of Annaly and New Residential, though.) These stocks are just waiting for you to place some cash in them so that you can sleep better at night.

This content is for our beloved subscribers and anything you see on this page is just an excerpt!

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August 17, 2017

An Update on a Few of Our Stocks

Rough day out there as we write this. Dow down 140 and the S&P 500 down 20 or 0.8%.

Nutanix (NTNX: $22.40) is having a good day. It’s at the top today of all of the stocks we follow, up 3%. Just think what a good day it would be having if the market were up 140 points instead of down 140. This stock is a winner that just hasn’t been realized yet. But note that if it had been discovered, the stock would be at $40 or higher where is ought to be.

Firsthand Technology Value Fund has disclosed that Nutanix is one of its top five positions. The fund is a small fund - $140 million – but they have put 7% of the entire fund into Nutanix. That’s $10 million.

Nutanix is a provider of hyperconverged data center equipment that merges computing, storage, and networking capabilities in a single piece of equipment. More businesses are looking to adapt the technology, with 18% of chief information officers saying they expect to move to hyperconverged systems in the next two years, according to a survey by Goldman Sachs. Goldman added the stock to their conviction list, saying it has an estimated 50% return potential to their $31 price target.

Last quarter Nutanix said it gained 800 new customers, with 20 global companies buying more than $1 million in hardware or software. The larger deals helped push overall sales growth to 67%. The company got some big name wins in the quarter, including corporate giants such as Caterpillar, Kyocera, Société Générale and Sprint. One undisclosed customer win was a retailer with $50 billion in sales in the U.S.

The company’s leadership in the space, including the combination of hardware and software it offers, makes it a “once-in-a-decade tech infrastructure story,” wrote Goldman. They see Nutanix on a path for long-term double-digit growth, high gross margins and large operating leverage.

Despite its leadership in the space, the stock is down 15% year-to-date. “The stock drop and Nutanix’s unique position in the space, however, make it a prime acquisition target,” Goldman said.

BMR Take: We like this company. Growth in revenues always wins out in the end.

Shopify (SHOP: $95) and Twilio (TWLO: $31) are both up slightly today too, even as the market is not having a good day. That sends us a strong message of confidence.