Follow These Four Market Leaders to Profits

Netflix is now the largest U.S. media company by market cap…

That’s right.

The streaming giant is bigger than Disney, which owns legendary franchises like Star Wars, Marvel, and ESPN, and dozens of theme parks around the world.

And it’s bigger than Comcast, which owns NBC, Universal Studios, and thousands of miles of cable lines across the United States.

Last week, Netflix’s market cap hit $153 billion. That surpassed Disney, which checks in at $150.2 billion, and Comcast at $146.4 billion.

Netflix’s rise has confounded many analysts. But it shouldn’t surprise regular readers of the Daily. On March 27, we identified Netflix as a market leader.

And as market leaders often do, Netflix rose even while the overall market stayed flat. Just look at this chart:

As you can see, market leaders can add ballast to your portfolio even in down markets.

Today, I’ll show you three other market leaders to consider adding to your portfolio. But first, let me explain why you want some exposure to these companies…

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How to Find Market Leaders

There’s no set definition for a market leader. But there are three traits that most market leaders have:

• They are innovative.

• They are growing fast.

• They are becoming more profitable.

Netflix possesses all three traits.

Like most market leaders, Netflix is a younger company that’s gaining market share in its industry. And it does that through innovation.

Netflix has created a huge catalog of movies and TV shows that viewers can watch on demand and commercial-free. People love the convenience of watching shows whenever they want to without the disruption of television ads.

Netflix’s streaming service has completely turned the cable television model upside down. Traditional networks like Disney’s ABC and ESPN, and Comcast’s NBC haven’t figured out how to adapt yet.

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Netflix has also gained a ton of share in the TV market.

Since 2012, Netflix has added 23 million U.S. subscribers… Meanwhile, the number of cable subscribers declined by about 4.5 million.

And that leads to the second trait: fast-growing revenues, profits, and margins.

You just need to look at Netflix’s financial statement last quarter: The company crushed it.

Revenue was up 32%, earnings per share soared 210%, and profit margins increased from 2% to 5%.

Netflix’s growing margins and profitability are attracting the attention of investors. And this pushes the market leader’s stock price higher.

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Three Other Market Leaders

There’s no one-click way to buy a basket of market leaders. You have to look for individual companies.

And there are three on my radar right now: Adobe Systems, SolarEdge, and Micron Technology.

Adobe is a leader in computer software; SolarEdge is a leader in solar power; and Micron is a leader in the chipmaking field.

All three companies have pulled back a little due to market volatility. But those pullbacks have been shallow and short-lived.

Time will tell if I’m right… But by identifying potential market leaders—and adding them to your portfolio—you put the odds in your favor.

As always, do your own research before investing in any company. And don’t bet more than you can afford to lose.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

Netflix is trading at a price-to-earnings (P/E) ratio of 100. The PE ratio is a common measure of a stock’s value. And by that measure, Netflix looks incredibly expensive.

Some of you might be questioning my sanity right now since I’m a fan of the company. But realize that the PE ratio looks backwards… not forwards. It takes the current price of a stock and divides it by last year’s profits. 

Using the P/E ratio works fine with companies like Disney and Comcast, which have stable, predictable sales and profits. But it’s not a good measure for fast-growing companies like Netflix.

Sometimes, these companies grow into their valuations. Just look at Apple:

As you can see, Apple went from a split-adjusted $1 per share in 2003 to $28 per share in 2007. Its P/E ratio rarely dropped below 40.

So don’t avoid a fast-growing company just because one value metric says it’s expensive.

If it’s a true market leader, like Apple was, it will become extremely profitable and make investors a lot of money.

—Nick Rokke

Over a 10-year period, this former corporate banking insider’s stock recommendations outperformed investors, including David Einhorn and Carl Icahn, by as much as 2-to-1.

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