Netflix (NASDAQ: NFLX), a DVD-rental business that competes with Blockbuster (NYSE: BBI), was upgraded yesterday by Michael Pachter, an analyst with Wedbush Morgan Securities. He sees good tidings ahead for the company. He believes that Netflix will see higher margins and a healthy stream of earnings. His thesis centers on the fact that the subscriber base is likely to grow and that streaming movies will lower the cost of delivery.
Upgrades are tricky beasts. Ideally, an investor or, more likely, a trader, wants to be in the stock before the upgrade occurs. Buying a company after it's been upgraded requires a lot of due diligence. And you have to get over the fact that you might be buying at a high price.
Indeed, Netflix soared higher yesterday by 6.8% to close at $40.40. Volume was active, too. Personally, I think Netflix may do well in this environment; economic pressures on discretionary dollars do confer a perception of value on the DVD-by-mail service. Furthermore, I found Netflix's first quarter to be a good one.
However, I also noted at the time that investors may have wanted to consider booking some profits. In case you haven't noticed, the company's stock has done well this year -- shares closed at $29.87 back on January 2.
To those who bought the stock at prices considerably lower than current levels, I say good for you! Investors who own at a lower cost basis have a lot more flexibility when it comes to deciding how to react to this upgrade.
To those who don't own Netflix now, I'd urge caution. While I think the company will continue to do well, I just can't get myself to buy the stock until it corrects in a significant fashion. If that correction does come, then you might want to look at the business. I may end up being wrong, but again, once an upgrade has occurred, you really have to weigh all your options, especially when an upgrade comes on the heels of a run-up.
Disclosure: I don't own any company mentioned; positions can change without notice.
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