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Exclusive: Why This Hedge Fund Manager Is Short Netflix

Javier Hasse

Rev. Emmanuel Lemelson was recently a guest on #PreMarket Prep, a daily trading idea radio show hosted by Joel Elconin and Dennis Dick.

Lemelson Capital Management Chief Investment Officer Rev. Emmanuel Lemelson discussed the tech sector. He believes the sector as a whole looks a little overvalued, since it’s been a bull market for the last five or six years.

He highlighted, however, that not all companies in the sector are overvalued, although there are situations where valuation seems quite high. This is the case for Netflix, Inc. (NASDAQ: NFLX).

The Netflix Short Stake

Lemelson told Benzinga he acquired a short position in Netflix on Thursday, a day after its earnings report, as he considers the multiple “outrageous.” Although he believes the multiple could be maintained, as in Amazon.com, Inc. (NASDAQ: AMZN)’s case, he notes this would not be as easy for the former, since Amazon is more diversified than Netflix.

Lemelson said that “a lot of things drove the market up in the last five or six years, with low interest rates being chief among them.” However, he sees these factors tapering off now as “obviously interest rates are going to go up” and buybacks are going down. Therefore, it will be increasingly difficult for companies like Netflix to maintain valuations at current levels.

Lemelson confesses he does not like shorting, but would still be short most of the overvalued tech names.

“When you look at a company like Netflix, [with] brilliant leadership, brilliant vision, really small earnings, huge market cap,” and compare it with Apple Inc. (NASDAQ: AAPL), which is really pushing into the streaming segment, “it is not clear at all that there’s a defendable moat” at Netflix, Lemelson assures. He acknowledges this might not be a popular opinion.

Lemelson added, “often times, they do not look like bubbles until it’s too late.” This is why he feels comfortable about shorting Netflix.

Latest Ratings for NFLX

Date Firm Action From To
Jul 2015 SunTrust Robinson Humphrey Maintains Neutral
Jul 2015 Rosenblatt Upgrades Neutral Buy
Jul 2015 RBC Capital Reiterates Outperform

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