A few weeks back, I flew to Dallas and hit an unexpected trifecta: in a single day, I visited three companies with strong insider buying. I wasn’t aware of this coincidence until after I scheduled the meetings and began researching the companies. I was pleasantly surprised. Significant insider buying is quite rare. It almost never happens here in the Bay Area, where tech firms hand out stock options like napkins. Needless to say, I was intrigued by each of these companies. However, I only wound up buying stock in two of them—and the reasons why are important.
I have to admit, I’m looking forward to the Republican debate on Wednesday. Love him or hate him, Donald Trump’s candor is entertaining. It’s somewhat fun to watch him dismiss his political opponents (including the sitting president) as “losers” and “lightweights,” and his critiques of my industry—which he refers to as “those hedge fund guys”—are mostly spot on. Too many big fund managers really are little more than under-taxed, economically destructive financial engineers. Trump’s strident anti-immigrant rhetoric is far more troubling, but it’s not hard to see why it appeals to voters who feel left behind by globalization and the increasingly polyglot composition of America’s electorate.
Most economic studies show that immigration, legal and illegal, is a net contributor, not a cost, to economic growth. Three decades ago, the legendary University of Chicago economist Milton Friedman noted that the majority of illegal immigrants work, pay income and payroll taxes, but rarely receive government benefits like Social Security and Medicare. Mr. Trump, on the other hand, has frequently been on the receiving end of government largesse. Despite his professed belief in free markets, he is the prototypical crony capitalist. Without all sorts of tax breaks, debt forgiveness, and giveaways, he would be far less rich.
I recently joined a group of other money managers for a meeting at Neflix’s (NFLX) Los Gatos, California headquarters. The company’s IR rep gave a concise 30-minute business overview, followed by 30 minutes of questions. I’ve never considered investing in Netflix and I probably never will. As a rule, I don’t buy or short popular, high-profile companies. But I have to say, I came away from that presentation more than a little skeptical about Netflix’s future prospects.
The company’s subscription service is a good, if not great business and its user growth has been impressive, but NFLX is an extremely expensive stock by almost any metric. Even after its recent selloff, its market capitalization still tops $40 billion vs. $6.8 billion in estimated 2015 revenues and roughly zero free cash flow in both 2015 and 2016. Its high valuation isn’t what worries me, though. Today about ten percent of the content available on Netflix is either licensed or created by the company. It plans to increase that number to fifty percent. To say this is an extremely risky move would be an understatement.