Netflix and the Lesson of a Crowded Short

Thursday, January 27, 2011

At its best, shorting stocks on fundamentals over a longer period should be a lonely endeavor in which the particpant is derided. It should be betting the don’t pass line at a craps table even as the rest of the table bets the pass line.

Traditionally, short sellers are perceived as being a smart and cunning breed running against the herd but in some instances they ARE the herd.

$NFLX reported solid earnings last night including 63% subscriber growth yoy, the stock price is up huge and making all time highs on big volume and noted short seller of the stock Whitney Tilson must be twisting.

The interesting thing to me though and the lesson for traders concerns the legion of shorts and skeptics in general who were already aboard and who hopped aboard to ride Tilson’s call.

At its best, shorting stocks on fundamentals over a longer period should be a lonely endeavor in which the particpant is derided. It should be betting the don’t pass line at a craps table even as the rest of the table bets the pass line.

When its not there is a problem.

I asked seasoned short seller Seabreeze Partners Doug Kass to comment and he had this to say,

I learned a lesson a long time ago. Life is too short to be short companies like $NFLX where as recently as December 31 over 30% of the float was short.  Squeezes happen routinely under these circumstances.  Add to that how well the company is executing on its strategy as reflected in its subscriber growth and its a clearly dangerous situation.

I learned from Doug a long time ago that the popular shorts are not the best ones as this instance attests.