A Bull Market Is Coming: Buying This Stock Is a Genius Move | The Motley Fool
The S&P 500, a major stock index that investors closely follow, ended 2022 down 19% on the year. Tighter monetary policy, with the stated intention to put a lid on soaring inflation, can be partly to blame for why investors shunned risky assets, sending stock prices lower.
Posting negative returns in back-to-back years is a rare occurrence. In fact, the last time this happened was during the dot-com bubble, when the S&P 500 fell three straight years from 2000 through 2002. No one knows for sure what 2023 will bring, but the odds favor a positive year, something that investors should view as welcome news.
With this optimism of hoping for a bull market in mind, buying this stock could be a genius move for your portfolio.
Look at this streaming leader
If a bull market does happen in the near future, investors are going to want to own growth stocks as they tend to bounce back quickly when asset prices start rising again. However, if there’s one key lesson that everyone should’ve learned from 2022, it’s that profits and free cash flow matter tremendously. While many fast-growing businesses relied heavily on access to cheap capital for most of the past decade, the economy is now in a new normal of higher interest rates. As a result, investors should prioritize companies that don’t need to raise external cash and that have strong balance sheets.
Netflix (NFLX -2.77%) is a prime example of an enterprise that perfectly fits this description. Toward the end of 2021, management made the announcement that Netflix would no longer need to raise additional debt to fund its operations, which turned out to be perfect timing as the Federal Reserve started aggressively hiking interest rates in 2022. As of Sept. 30, the company had $14 billion of gross debt on its books, within management’s range.
According to the leadership team, the top streaming service is projected as having added 4.5 million net new members in the last three months of 2022. And annual revenue is forecast to come in at $31.5 billion, good for a 6% increase versus the prior year. Investors will know for sure when Netflix reports earnings next week on Jan. 19.
Over the next five years, Wall Street consensus analyst estimates call for sales to increase at an average yearly rate of 10.2% between 2022 and 2026, with earnings per share rising at an even faster clip of 19%.
What’s more, Netflix is expected to have generated slightly positive free cash flow in 2022, a major accomplishment for a business that many thought would never reach this point. And starting in 2023, there could be “substantial growth” with this financial metric. That’s exactly what investors should be looking for now.
Netflix shares are up about 91% over the past six months, a clear indicator that investor sentiment has now turned positive on the stock. In the first two quarters of 2022, Netflix lost a combined 1.2 million subscribers, a first for the company, and this helped drive shares sharply lower. At one point last year, the stock was down a whopping 72% from its all-time high set in November 2021. It looked like the best days for this streaming pioneer were a thing of the past.
But as is always the case with the markets, investors can become overly optimistic in good times, pushing up share prices to irrational levels. And when there’s any bit of bad news about a particular company, these same investors ignite a sell-off that is far worse than the fundamentals would suggest. Based on its recent stock performance, I think we’re seeing this play out with Netflix.
Netflix is still a leading global media and entertainment business with solid growth prospects and a stronger financial position. Plus, investors have the opportunity today to buy the stock at a compelling price-to-earnings ratio of 30, which is well below its trailing-five-year average. That’s an attractive setup should a bull market take over the market this year.
Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
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