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Netflix Gets a Thumbs-Down Rating


The downgrades it received will take a toll on the shares in today's session and the days to come.

Asian stocks ended mixed. The Hang Sang slipped 0.14% overnight, and the Nikkei rose 0.31%. Meanwhile, European stocks were in negative territory earlier this morning. And here in the US, we're currently trading higher.

Here's what I'm seeing this morning:

Netflix (NFLX):
Justin Sharon points out that Kaufman Bros. cut its rating on the video-rental company to Hold, and Susquehanna and Bank of America lopped their ratings, too.

1. As I said in a recent article, I think Netflix is the clear play in the video-rental business right now because Blockbuster (BBI) simply has too many issues. That said, I do think these downgrades will take a toll on the shares in today's session and in the days to come as some brokers are likely to move their clients out of the shares on the heels of this news.

2. This is a lot for the investment community to digest. If the price pulls back to the upper $50s, which is a possibility, I'd be a lot more excited than I am now. I do think the company has a bright future when it comes to earnings.

3. By the way, check out Coinstar (CSTR) too, which sports those rental machines at grocery stores. The earnings outlook for it looks pretty sweet.

Hovnanian (HOV):
Did the homebuilder really nail it in its first quarter? It earned $236.2 million in the period. Not bad, however this line in the release stuck out like a sore thumb: "As a result of tax legislation changes, the after-tax net income included a federal income tax benefit of $291.3 million."

To its credit, it did manage to beat estimates by a smidge on the top line, generating revenues of about $319.6 million.

Some thoughts on Hovnanian and housing in general.

1. I certainly don't want to beat up on Hovnanian because I've got respect for it as a homebuilder. That said, its sub-$5 stock price is likely to be a tad of an impediment toward it getting attention from analysts and investors in this market. Second, the losses it's expected to post are pretty ugly, so I won't be bellying up.

2. As I've said in the past, I still don't believe that this is a terrific time to cuddle up with conviction to the builders -- particularly with higher rates and possibly higher taxes on the way. Also, keep in mind that Americans are feeling much less wealthy these days, having less equity in their existing houses and stock portfolios that are nowhere near where they were three years ago.

3. I'd much rather bet on Lowe's (LOW) or Home Depot (HD), both of which sell construction materials to contractors and do-it-yourselfers, the latter of which are likely to be spending a good amount of money come spring when the better weather arrives.

Staples (SPLS):
The big-name office-supply retailer was out with its fourth quarter.

Excluding items, it put up $0.38 a share, which isn't horrible, but then again not too great either given that the Street was at $0.39 a share. But what folks are likely to be talking about this morning is its outlook: It's looking for $1.23 to $1.33 a share for 2010, which is shy of the Street estimate of $1.39.

Some thoughts:

1. I think the shares take it on the chin given the news. And it could be under pressure over the next few days, too, if analysts ratchet down their full-year 2010 estimates.

2. But frankly, $1.23 to $1.33 wouldn't be all that terrible given the environment we're in. If the shares get down to the high teens, I'd be very interested.

3. I still think a better way to play office supplies is by bellying up to a company like Walmart (WMT), which may not have the same depth and inventory as Staples and its brethren, but still sells tons of notebooks, pencils, fax machines, computers, and so forth.

Pepsi (PEP):
Goldman slapped a buy rating on the soft-drink company.

I've been a big proponent of Pepsi for a while. As people begin to loosen their purse strings, they're more likely to dine out and start restocking their pantries, and restaurants are likely to keep inventories at slightly higher levels. Plus the spring and summer months are coming around, which means that folks will probably be consuming a little more in the way of cold beverages. In short, I think the shares move higher on the news and that Coke (KO) could come along for the ride.

Have a great day!
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