Why Whitney Tilson Covered Netflix Short Position (NFLX) ~ market folly

Friday, February 11, 2011

Why Whitney Tilson Covered Netflix Short Position (NFLX)

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has covered its short of Netflix (NFLX). Last week we detailed that T2 had cut short exposure and was re-examining how they executed their short book. At the end of the day, they decided not to short stocks purely on valuation and to shift their focus back to buying cheap stocks.

Three Reasons For Covering Netflix

Tilson says that they're no longer confident in their short thesis on NFLX and he lays out three primary reasons as to why they've covered:

1. The company's latest earnings "weakened key pillars of our investment thesis, especially as it relates to margins."

2. Their channel checks and survey of NFLX subscribers indicated higher usage of NFLX's streaming service.

3. The Netflix CEO's letter to short-sellers made them re-examine their assumptions

The full letter detailing Tilson's rationale for covering his short position in Netflix is embedded below:

You can download a .pdf copy here.

Some contrarians will look at this event and exclaim that the 'last of the short-sellers has capitulated' so it's finally time to short NFLX. Just keep in mind that a sizable portion of NFLX's float is still shorted. While Tilson has been a public short, he is by no means the last short to cover his position. For a contrast of his 'before and after,' here's why Tilson was short Netflix in the first place.

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