I wrote earlier this week about how the Netflix (NFLX) bulls are running for cover. I don’t want to harp on Netflix too much specifically, but there are crucial lessons to learn from hardcore momentum stocks that slip up. Since I wrote that piece, the stock is down another 15% or so. It’s hard to believe that it was trading above $210 about a week ago.
What Goes Up Comes Down Harder
Netflix had a seemingly endless runup over the past few years to heights that stunned the bears as their business started to take off. However, once it sputtered with the news that it lost a million customers, the stock has plunged over 35% in less than a week. This is the nature of all momentum stocks that lose their mojo. The fast money players that pushed the price higher head for the exits all at once and it is an ugly sight for those longs still holding.
Broken momentum stocks suffer from a double whammy on the way down. The stock gets crushed from its highs and it is a very long way down until it even approaches “value” territory. The second whammy occurs because the inflated p/e compresses, which put further downside pressure on the stock. For example, investors were willing to pay up for Netflix’s growth, but since there are serious doubts about that growth now, players are not valuing that growth as high anymore.
Trying to catch a bottom in a stock like this is extremely risky business. People assume it will go back to its highs right away and keep averaging down into the selling. This is a great way to lose your entire bankroll because fear permeates on the way down and it can drop much further than you think is reasonable. The best way to approach it is to avoid a broken momentum stock or at least wait until it stabilizes. You might miss some bounces, but getting it wrong and getting wiped out is a much worse alternative. I had an initial downside target on Netflix of $110, but it is rapidly approaching that. Let’s see where it settles out.
It’s Tough To Fix A Broken Momentum Stock is an article from: 
