Two years ago, at the peak of the financial crisis, I bought Netflix (Nasdaq: NFLX ) close to $24. Today it's worth about $152 a share, for a whopping 525% return. My $17,000 original investment's value? An outstanding $120,545.
That is, if I hadn't sold at $45. Take the next four minutes to profit from my $100,000 mistake.
Buying a winner
My purchase thesis was spot-on. Netflix's key competitor, Blockbuster, began aggressively pricing its own DVD-by-mail offering. This, combined with broader economic turmoil, led to a weak quarter for Netflix. The market responded strongly, pounding Netflix's stock down 13% in a single day.
I was quite sure the market was overreacting.
Blockbuster had more than $700 million in long-term debt, versus Netlflix's almost $300 million in cash and short-term investments. Netflix had already fought off Wal-Mart and Amazon, and Blockbuster would not be a challenge. I knew the analysts and market had it all wrong, and I was going to do my best to profit from it. I backed up the truck, and ultimately I was rewarded, receiving a near-double on my investment in less than a year.
Doubting (and selling) a winner
Since you know where this story ends, I'll cut to the chase. I began doubting how much more Netflix could rise, even though it was, and remains, the stock most recommended by David and Tom Gardner in Motley Fool Stock Advisor:
In addition to head-nods from the founding Fools, I had several other advantages over Wall Street:
- I had been a customer and follower of the company for years.
- My profession is running Web businesses. At Fool.com, I obsess over the same metrics Netflix reports on every quarter.
- Stock Advisor had an exclusive interview with Netflix CEO Reed Hastings in 2005. The bigwig analysts on Wall Street probably didn't bother reading this. I studied every word.
Instead of utilizing the advantages that I had, and focusing on Netflix's long-term growth story, I paid attention almost entirely to the price of the stock. "Netflix was a double in a year," I exclaimed. "How can it keep rising?" Others backed me up, using the same less-than-valid rubric, and I took action, selling 100% of my Netflix holdings over the course of a few weeks.
This was pure ignorance on my part, and it's the greatest investing lesson of my lifetime. Now, I sincerely hope I can apply it to some of your holdings to keep you from making the same mistake.
Let's go through some other high-flying stocks near their 52-week highs, and I'll give you good reasons not to sell them today based purely on price.
% of 52-Week High
|Apple (Nasdaq: AAPL )||$289.19||$294.73||98%|
|Sirius XM (Nasdaq: SIRI )||$1.27||$1.31||97%|
|Annaly Capital (NYSE: NLY )||$17.84||$18.99||93%|
Source: Capital IQ, a division of Standard & Poor's.
Why not to sell: Don't sell Apple if you believe the iPhone will continue to be the dominant device in the smartphone category, and that other tech giants will continue to flounder in the industry, similar to the Microsoft (Nasdaq: MSFT ) Kin debacle in July.
Why sell: Sell if you believe Apple will misuse its $40 billion mountain of cash. By not returning the cash to shareholders as dividends, as Fool analyst Eric Bleeker suggested in June, investors are putting an increasing amount of faith in Steve Jobs' ability to create shareholder value in other ways.
Why not to sell: Don't sell Sirius if you believe the size of the premium radio category has yet to be defined, as fellow Fool Rick Munarriz stated on Tuesday. Don't sell Sirius if you think that a decrease in the churn rate and increased subscribers (more than 20 million) are positive indicators of things to come.
Why sell: Sell Sirius if you believe it will have trouble repaying or continually refinancing its $3 billion in long-term debt.
Annaly Capital Management
Why not to sell: Don't sell this REIT if you believe in the sustainability of its 15.4% dividend, and that the mortgage-backed securities it holds are of a higher quality when compared to others in the category, such as riskier spinoff Chimera Investment (NYSE: CIM ) and American Capital Agency (Nasdaq: AGNC ) , which sport 17.7% and 20.8% yields, respectively.
Why sell: Sell Annaly if you believe a high-interest rate environment is approaching. Since Annaly makes its money on the spread between low-interest borrowing and purchasing high-interest securities, a macrodriven rate change would damage its spread, and ultimately put its dividend at risk.
What you didn't see
I didn't mention price in the above write-ups for one simple reason: Where a stock has been is absolutely not relevant to its growth prospects. That's what David Gardner has been telling members of Stock Advisor and Rule Breakers for years. It's advice I wish I had heeded, as I'd be $100,000 richer today.
From now on, I'm sticking with Dave. I suggest you do the same.
His rule-breaking team has active recommendations on the next great companies, regardless of price.
The Fool has created a five-page free report explaining how two video game leaders are set to skyrocket as their niche grows into a $91 billion dollar market by 2015. If these companies are successful, does it really matter if they are at their 52-week high? Not a chance!
To get instant access to this report, click here now.