John Thaler's JAT Capital Loads Up on Netflix (NFLX) ~ market folly

Friday, September 30, 2011

John Thaler's JAT Capital Loads Up on Netflix (NFLX)

John Thaler's hedge fund firm JAT Capital just now filed a 13G with the SEC regarding shares of Netflix (NFLX). The hedge fund now has a 7.6% ownership stake in Netflix with 4,017,691 shares as of September 29th.

This means they've ramped up their position size by a massive 768% since the end of the second quarter. The fine print of the filing also shows that of the 4 million shares they now own, 2,617,691 are common stock and 1,400,000 are represented by options. The options portion of their position is new because they only owned 467,812 shares of common stock at the end of Q2.

This position increase is interesting for a number of reasons:

1. NFLX shares have largely sold off because of CEO Reed Hastings' recent announcement that the company will be separating its streaming business (Netflix) and its DVD business (with the newly named Qwikster). Also, NFLX shares have been under pressure due to a subscriber exodus over a recently announced price increase.

It's clear that Hastings feels that the streaming business is the future (and he's right). By separating the businesses, he's allowed the company to focus on its long-term future. However, critics question whether or not the split has come too soon and they've lambasted Hastings for a public relations nightmare in the way he's handled everything.

Thaler's hedge fund has clearly identified the NFLX sell-off as an opportunity to increase their wager on the company's long-term positioning and future. Thaler himself has 10+ years of experience in the technology-media-telecom space. Before founding JAT, he managed the Omni Fund at Shumway Capital Partners.

2. Hedge funds only have to file a 13G with the SEC when they cross the 5% ownership threshold of a given company's shares. JAT's filing indicates they crossed that level on September 20th. The only problem here is you don't know exactly when they were doing the bulk of their buying. As of September 29th, they own 7.6% of the company. On the 20th, NFLX was trading around $130 and shares currently trade around $113.

3. On Thursday, the internet was flooded with rumors of a hedge fund liquidating, mainly due to large price declines in "momentum stocks" such as NFLX. Some rumors even recklessly tossed out JAT's name as a fund that could potentially be "blowing up" since some of their other large positions were trading down sharply like Baidu (BIDU) and Sina (SINA).

However, those rumors were quickly quashed once people actually looked at JAT's numbers. As of September 16th, JAT Capital's Offshore fund was up 37.29% for the year. These performance figures of course don't include the week's most recent volatility, but we've been hearing they're still up big.

In the end, just focus on the facts. The SEC filing shows JAT was buying Netflix and they crossed the 5% ownership threshold on September 20th. And as of September 29th, they own 4 million shares via common stock and options.

For the time being, it appears as though Thaler's fund is betting on NFLX still having a bright future. In other coverage of this hedge fund, we detailed JAT's buy of IMAX in early August.

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