He's at it again!
If you're an avid reader of Foolish articles, you've probably spotted many references to Mr. Market and his mood swings. The story, usually attributable to Warren Buffett, is that investing is a lot like negotiating with a Mr. Market, who offers you a different price every day (or minute). When Mr. Market is in good spirits, the asking price is high, but when he's gloomy, you can pick up shares of great companies at a significant discount.
I think it's an apt analogy. Consider the stock price movements of Netflix
In September 2004, Netflix shares bounced around in the $14-$16 range, rising to $17 in anticipation of the Oct. 14 earnings release. But anyone who jumped in hoping for a lift was in for quite a shock. Citing fellow Motley Fool Stock Advisor pick Amazon.com's
As one can imagine, Mr. Market's reaction to this news was harsh. On Oct. 15, Netflix shares traded below $10. But fast-forward seven months to early May 2005, when Netflix shares again traded at $15+ per share.
What changed in the meantime for Netflix shares to gain 50% since their October 2004 lows? Not much, actually. The company reported two sets of quarterly earnings; neither was earth-shattering. Meanwhile, Carl Icahn won a seat on rival Blockbuster's
Yet, valuation-wise, Mr. Market has slapped today's unprofitable Netflix with the same price tag as the Netflix of yesterday -- back when the company was forecast to earn $1.31 per share in fiscal 2005. Future expectations aside, valuing both versions of the company at $800 million just doesn't make any sense, even to an optimistic shareholder like me.
Keep this story in mind next time a stock in your portfolio takes a beating and everyone heads for the exits. While you certainly shouldn't hold on blindly and wait for the price to magically rise again, there is no reason to accept Mr. Market's gloomy outlook, either. Instead, ignore the direction of the price movement and rely on your own analysis of whether the company is still a good investment. If it is, be patient -- it's likely that Mr. Market will undergo yet another mood change soon.
We've got more Netflix takes in our queue: