November 25, 2011

A Loonie Netflix Double Play

By Karim Rahemtulla

I’m currently in Vancouver on a research assignment and it’s inspired me to revisit a few recommendations that I’ve shared with you here in recent weeks.

Specifically, I want to give you an update on my advice about diversifying into the Canadian dollar and steering clear of Netflix (Nasdaq: NFLX) shares.

Amid the intense market volatility, both situations are panning out as I predicted. But in case you missed them, fear not… there are still opportunities to profit, as I’ll explain below…

The Canadian Blueprint for a Successful Economy

A few weeks ago, I suggested that you look at the Canadian dollar, or loonie, if it began to weaken.

It looks like that process is beginning.

The ripple effect from Europe’s assorted woes is now impacting the Canadian dollar. Fears are growing that as the problems continue to hurt the global markets, demand will shrink for goods that are produced, mined, or drilled in Canada.

You see, Canada is a leading global supplier of oil, metals and timber – three areas that have seen robust demand over the past decade.

This has benefited Canada enormously, allowing them to reduce its national debt, balance its books and enjoy a decade-long boom, where real estate prices have tripled or quadrupled in some places.

Unlike the United States, however, while prices are over-extended, Canada is less prone to a real estate bubble. That’s because, for the most part, Canadians have to put down 20% or more to get a mortgage.

Having so much equity in a home means that the owner is less likely to walk away. And it’s just one of the reasons why Canada’s banks are the strongest in North America.

As for the “froth” in Canada’s housing market, much of it came from places like Hong Kong, as the Chinese look to move money to more secure locations. But in order to buy Canadian real estate, you have to buy Canadian dollars first.

The Loonie is on the Move

Ten years ago, you could buy one Canadian dollar for $0.60. Earlier this year, you had to pay $1.05. Right now, that number is in the high $0.90 level.

Verdict: The Canadian dollar is correcting, presenting one heck of an opportunity to diversify out of the U.S. dollar, while still maintaining some exposure to the U.S. market. (Remember, the United States is Canada’s biggest trading partner.)

If the loonie drops below $0.90, you should use the opportunity to establish a position in the currency. Canada has much more going for it than the United States in terms of sound fiscal and monetary management and lack of exposure to financial bubbles.

The Road to Redemption for Netflix is Long

A few months ago, I suggested that you either sell Netflix shares or short the stock.

At the time, the price was just under $300. But today, shares are trading below $70.

If you took my advice back then… congratulations! 

However, Netflix is no longer a slam-dunk short sell. If you are short, you should cover. You see, it’s not all bad news for Netflix…

Yes, the company still has issues: Content isn’t cheap and it’s getting increasingly harder to come by. Plus, competition is heating up across the board – from cable, internet and other DVD rental outlets.

But Netflix has a major advantage for now – 24 million of them, in fact. Its 24 million subscribers are still paying their bill every month. And if they’re anything like I was (before I canceled), they’re watching only one or two movies a month.

Having that many subscribers gives Netflix the edge in terms of ongoing revenue. Plus, recent tweaks – like dumping the disastrous Qwikster effort and maintaining the price hike across the board – will now increase the company’s revenue and profits once content acquisition costs are met.

Verdict: While Netflix shares have tanked, I’m not ready to buy on the dip just yet. I’m not recommending a short position anymore, either – especially after gaining more than $200 on the original trade. But I’m keeping an eye on the company from here, because while it may be down, don’t count it out just yet.

Courtesy Karim Rahemtulla via Wall Street Daily - In a World of Liars, the Truth Starts Here.  (EconMatters author archive here 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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