Mind Blowing Turn of Events

Apple and Netflix are certainly a tale of two different companies and two different stock prices right now.  Once the envy of the market, we have well documented the free fall that Apple's share price has been in since last fall.  On the other side of the equation, Netflix whose stock was being hammered for most of 2012 is now on a trajectory towards the moon.  The reason...one company reports an unbelievable quarter and misses expectations i.e. Apple, while Netflix beats expectations while turning in a decent quarter.

Full disclosure we are long Apple and short Netflix.  The stories between these two companies could not be more different.  In the Apple, you have a company setting all time records as far as revenue, profit and cash are concerned but there is fear of where the next big break through will occur and legitimate concern over margin compression.  With Netflix, you have decent but not great subscriber growth and an ever rising cost of content that is sure to eat into profits and cash.

The big winner in this surge in Netflix share price is billionaire investor Carl Icahn.  Icahn reported a 10% stake in the company in November, buying about 5.5 million shares at around $58 a share. He is now sitting on a nearly $500 million gain.

From a fundamental standpoint Apple and Netflix are on opposite ends of the spectrum.  From a technical standpoint Apple and Netflix are on opposite ends of the spectrum.  So which side wins?

We are betting that the fundamentals are going to eventually win out in this current dual between these two companies.  In fact, we will likely be adding to our short position of Netflix today and have already indicated that we would be buying Apple near the $425 mark.

Investors should be somewhat patient with this strategy as it could take come time to play out.

Morningstar piece on Nertflix

WSJ piece on Apple