Novice Investing - Has Panic Set On These Investments?

Date: Sunday 20th 2008f July 2008 12:32:39 PM

Has Panic Set on These Investments ? - 07/25/2007

By: Hari Wibowo

You can make your best investments when panic sets in. In a panic, investors will sell in mass and drove price down. As a result, long term investors can pick these shares at a lower price. To that end, we always scour around stocks trading at or near their 52 weeks low. Back in March, we have talked about the subprime woes and lower oil price (I am wrong on this). Since then, subprime woes had not brought down the entire stock market but yet shares of related banks are at 52 week low. We believe that the worse is not over. Stocks that we look at today include Countrywide Financial, Washington Mutual and Netflix

Countrywide Financial Corp. (CFC) got a bad beating this week when it reported that its default rise and net income is reduced. Shares had fallen to $ 30.50 per share and a trailing P/E of 7.77. Sounds cheap, until you consider the fact that delinquency rises to 4.56% for prime home-equity loans and 23.71% for subprime loans. One must wonder whether earnings will be dragged down further than $ 3.93 Countrywide earned in the past twelve months. By my estimation after everything is said and done, Countrywide would probably earn less than $ 3.00 per share. At this point, management's guidance look bleak. Countrywide does not expect the home market will recover before 2009 at best. This puts Countrywide as an unattractive investment for the next one year or so. However, investors always do look ahead and if things will improve by 2009, Countrywide should be bought before then. I believe that the subprime mess has not been fully exposed, as I've said back in March. If things go really bad, I would expect Countrywide to drift further, perhaps to as low as $ 20 per share. This probability is not big but if it does hit $ 20 per share, you should be atracted at this company for your investment.

Washington Mutual (WM) is next in line in the subprime mess. While it does not have a big exposure to the subprime loans, Washington Mutual does have a huge exposure on the mortgage business. Shares sank to as low as $ 39 per share this week as Countrywide earning dissapointment sparked sell off in the banking sector. With dividend yield of 5.40%, Washington Mutual would

be a good stock to buy for income starved investors. It has a decent forward P/E of 10.6 but it is not terribly undervalued for a mortgage bank. Generally, bank sectors receive a fair P/E value of around 13-15 in good times. Now, it is not a good time to for big banks and Washington Mutual needs to fall below $ 30 per share to make it an attractive investment.

Netflix Inc. (NFLX), the online movie rental competing against the like of Blockbusters and Movie Gallery, had the first ever subscriber loss in its eight year history. Netflix still amasses 6.74 Million subscribers. Assuming a low $ 10 per month fee per customers, that is an estimated 808 Million. By doing its business completely online, Netflix has some cost advantage compared to rival Blockbusters. However, postal fee will start to eat into margins for the more active subscribers. That of course can be remedied by giving out different pricing for a more avid subscriber that rent, say, 3 movies at a time ($17.99 per mo) as opposed to a subscriber that rent one movie at a time ($5.99 per mo). Blockbuster had tried to expose Netflix's weaknesses by offering online movie rental with in-store coupons. While it does slow Netflix in the medium run, in the long run, it would hurt Blockbuster's profitability even more. Think about all the personnels Blockbuster has to do both online and brick and mortar stores. Recently, Netflix had 1300 employees while Blockbuster had 33 600 employees !! That is a huge cost advantage right there. Thus, while Blockbuster is expected to post another yearly loss, despite the recent setback, Netflix still expects a profit of $ 45 Million for 2007. Another thing with Netflix is its solid balance sheet with positive net cash of $ 400.4 Million or $ 5.9 per share. Recent share price hits 52 week low at $ 16.13 per share. Going forward, Netflix is already expanding into video download. While it does not expect video download to be a real hit in the near future, it does has the potential to replace video rental, just like i Tunes is replacing CD sales.

Looking at Netflix's depreciation shows that it depreciates all its long term assets within one year time! This is considered good. Moderate companies will depreciate all their long term assets within three to four years while the most aggressive ones will depreciate it fully within ten years. Therefore, there is a lot of potential in Netflix should they invest in a longer term assets or if they decide to lax their accounting standard a little bit. My estimate is that it will bring an additional $ 40 Million pre tax profit, or $ 0.60 per share. Thus, total net income can go to as high as $ 1.35 per share. With share price recently trading at $ 16 per share, Netflix is definitely attractive investment potential. We would research Netflix deeper for our sample portfolio pick.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Netflix Inc. (NFLX) or any other securities.

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