Netflix stock plummets 35%
— -- Netflix is giving investors a front-row seat to the sequel of the dot-com crash.
Shares of Netflix on Tuesday crumbled $41.47, or 35%, to $77.37, adding the latest scene in the stock's horror show this year. Shares have fallen 75% from their high this year, as investors react to customer defections from price increases and strategy changes.
Netflix, though, is just one of the latest in a recent rash of stocks suffering massive one-day sell-offs that bring back memories of the kind of carnage that was common after the Internet stocks crashed to Earth in 2000. First Solar crashed $14.68, or 25%, to $43.27 on Tuesday on news that the alternative-energy company's CEO has been replaced. That comes a week after Crocs, a maker of rubber clogs, fell 39% in a day.
Such crashes are rare. So far this year, stocks in the Standard & Poor's 1500 index have fallen by 30% or more in a single day 16 times, already topping the 12 such instances in all of 2010, says S&P Capital IQ. There were 111 such big drops in 2008, the most in the past five years, S&P Capital IQ says.
But investors caught holding these blowups suffer brutal losses that can take years to repair. "It's a warning to investors. If you buy hot stocks, you're likely to get burned," says Alan Skrainka, chief investment officer at Cornerstone Wealth Management.
The recent stock blowups are a reminder to investors to mind the perils of:
•Momentum stocks. Certain stocks dazzle investors because they don't seem to ever go down. But as soon as there's even a whiff of bad news, investors run, says Michael Corty, analyst at Morningstar. Other stocks investors are turning on include Green Mountain Coffee Roasters and Red Robin Gourmet, which are now down more than 35% from their highest points in the past 52 weeks.
•Shifts that kill business models. Negative shifts in the economics of a business light the fuse. For instance, content companies are charging higher fees from Netflix for the streaming business, making it a much less attractive business than the DVD-by-mail model, says Tony Wible of Janney Montgomery Scott.
•Buying what you know. Investors may have bought Crocs or Netflix because they liked the service. But that strategy often disregards the critical step of valuation, or how much you pay for the shares, Skrainka says. "The idea that you like the product so you buy the stock is a silly idea," he says. "Some people are finding that out for the first time."
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