Yesterday was one of those sessions where the market couldn’t get out of the starting gate, but buyers continued to sniff around looking for opportunities. This is why so many of the best-performing stocks were beaten-down names that have begun building a base. Just for clarification, ‘beaten down’ means it is a lowered share price, but that doesn’t always mean it’s oversold. Sometimes these stocks are still overvalued and pausing before the next leg lower.

That being said, in a market driven by machines and emotions, even great stocks can see their share price become oversold.

So, buyers bought “cheap” stocks and bid up the Russell 2000 again, as that index is now up more than 3% in the last five sessions but up only 13% for 2019.  

Russell 2000

The Biggest Bottom Fish

The kind of bottom fishing seen since late summer is often done by professional money managers in hopes of catching an upside pop that helps their performance catch up. That’s what happened to Netflix (NFLX) after the close. The company posted its financial results:

• Revenue: $5.24 billion, consensus: $5.25 billion
• Earnings: $1.47, consensus: $1.04
• Domestic subscribers: 517,000, consensus: 802,000
• International subscribers: 6.26 million, consensus: 6.05 million
• 64 million watched “Stranger Things” in four weeks

I was very impressed with the continued contributing growth in margins.

The talking heads spent most of the evening trying to talk the stock lower, which makes me think it could hold onto last night’s gains. The stock is oversold, and while few would call it a value investment after $300, the next big resistance point is $336.00.

By the way, Netflix’s DVD business is still around. Last quarter, there were 16,000 free trials and 2,276,000 subscribers generating $71.9 million in revenue and sporting a 61.3% margin.

There is a 5% short position of Netflix shares. The squeeze could be powerful; however, I think once all the new rivals have been officially on the scene for six months to a year, we’ll discover Netflix will remain the top choice of consumers, and the stock will probably reflect that value (which will be higher than where the stock opened today).

Between now and then, look for talking heads to jawbone the stock, even as the investment proposition improves.

Portfolio Approach

Today’s Session

Earnings continue to outpace consensus estimates for the larger companies posting beats this morning, including Morgan Stanley (MS), the last of the “big six” banks to report.   Equity futures were higher on that news. We got another nudge on headlines of a potential Brexit deal, which feels even more likely after a short press conference with Boris Johnson and Jean-Claude Junker.

Economic reports out this morning missed consensus, but there is a much more intriguing story beyond the headlines.  I’ll have details on Philly Fed later.  Meanwhile, housing starts declined 9% from the best level in ten years.  I like what we are seeing in single family homes, which has social economic ramifications that we should cheer.