The crash last week of Netflix Inc. (NFLX) shows how badly investors in growth stocks can get hurt when the music stops. The Netflix debacle shows that if you are investing for price appreciation, you need to have an exit plan or alternative strategy.
And that’s true not only of tech stocks, but of any stock…
Netflix was one of the hot stocks of the pandemic lockdown. From around $300 per share during the short 2020 bear market, NFLX rocketed up to a peak of $700 in early November 2021. Investor sentiment was that the company could continue to grow subscribers and revenue indefinitely. However, two consecutive poor earnings reports have pushed the stock price down 70% in five months, including a one-day 35% selloff last week.
I point out the Netflix rise and fall as a learning moment for investments in the current hot energy and commodity sectors. If you are invested in commodity stocks for the capital gains, be ready for the ride to stop.
While I don’t expect commodity and energy prices to crash like NFLX (though I may be wrong), the prices will stop rising at some point and may even decline. Think about your energy stock investments. How will they fare if crude oil drops from the current $100-per-barrel range to settle into an $80 to $90 trading range?
My point is that any period of rapid price appreciation will end. Many investors project gains to go much farther than what actually occurs, and they will be disappointed by the final results. Consider the case of Amazon.com (AMZN): the share price has gone nowhere since September 2020. That’s 20 months of stagnation on a high-priced stock.
My recommendation is to invest in companies that share profits with investors in the form of dividends. I watch for energy companies with progressive dividend policies that pay out a large portion of profits as cash dividends. That way, if oil pulls back but stays in my expected $80 to $100 range, I will still earn a nice dividend every quarter.
Several upstream energy companies have adopted variable dividend policies, consisting of a base dividend combined with a variable dividend based on profits for the quarter. Energy prices for the first quarter have been very high, and I look forward to announcements of some huge dividends.
For example, in March Coterra Energy (CTRA) announced a $0.15 base dividend plus a $0.41 variable dividend. The $0.56 total gives the stock a 7.5% yield. I recommend several others like this to subscribers to my newsletter services. Chief among them is The Dividend Hunter, where I show subscribers how to turn their investments into an income-generating machine that could even cover your bills, all in just 36 months. To see how to get started, click here.
As a final note – and it’s not my area of expertise – I think the newly formed Warner Brothers Discovery (WBD) will be the winning stock in the streaming wars.
