How a Big Price Drop Equals Big Opportunity

Since Motley Fool Stock Advisor opened its pages in 2002, David and Tom Gardner's stock picks have returned an average of 77% each. That compares with 25% for equal positions of the S&P 500.

We're celebrating the newsletter's 10-year anniversary by releasing -- for free -- the recommendation articles for several of the newsletter's biggest winners. Today we look at a stock familiar to everyone: Netflix (NAS: NFLX) . David has recommended this company six different times, and all six picks have at least doubled.

The highest return came from a re-recommendation in late 2004, after the stock had lost a quarter of its value. Sound familiar?

Following is the writeup exactly as it appeared in the December 2004 issue of Stock Advisor.

David's Top Pick: Netflix

Those of you who have been with us a while know that we've had very good success adding to or reinvesting in stocks. That hasn't yet been the case with my top pick for you this month. But I believe it will be, and that's why I once again recommend Netflix.

That's right, the same stock that got walloped a few weeks after I recommended it to you in an update on Sept. 30. We're currently sitting on a 23% loss, quite in contrast with our near three-bagger the first time round the maypole with this stock.

But I am a Netflix believer and was in there as a buyer myself in November. I think this is one cheap stock at $11, backed by a great management team that's going to create value for us going forward. I believe in 2005 we will see the company's strategy to lower prices pay off and multiply its subscriber base.

My "A" grade for price (see page 5) means I recommend you buy more here, while I've graded the business prospects "B" because of possible competition from (NAS: AMZN) and the ever-present prospect of video-on-demand. Those are what sunk the stock price in 2004, but that's exactly why we're getting a good entry price today.

I expect Netflix will wind up being the last one standing in this profitable video-by-mail business. It remains first and best in a growing industry, creates convenience for millions of consumers, and is led by visionary management that markets aggressively.

There is risk here -- this is a speculative investment, absolutely. Yet I confidently state my belief that market sentiment -- and its accompanying buyers -- will swing back NFLX's way in 2005 as lower prices and an established brand help beat the competition -- and lead to market outperformance for the stock.

-- David Gardner, December 2004

Investing lessons
David has been extremely effective re-recommending beaten-down companies he still believes in. Netflix was no exception. Investors had been worried that Wal-Mart (NYS: WMT) and Amazon would wipe out the company, much as Netflix took down Blockbuster.

Today, the price is down big once again as investors worry about the company's ability to compete against intense streaming competition, the most recent entrant being Redbox Instant, a joint venture between Verizon (NYS: VZ) and Coinstar (NAS: CSTR) . The barriers to entry are much lower in the streaming content arena, and much of Netflix's success rides on whether it can successfully execute its aggressive international expansion.

Will the stock go on another run? You can find out everything you ever wanted to know about the company in our premium Netflix report. It includes a full year of analyst updates, as well as a dive into the key opportunities and risks facing the company. Read more.

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