Comparing Growth and Value Grades For Netflix With

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A very popular feature in is the Profile Rating Change, which allows a user to recalculate any company’s overall grade–and thus its rating–based on its ‘Growth’ or ‘Value’ profile. Comparing the ‘spread’ between a company’s growth and value grade is a very good way to find stocks that have gotten ahead of its fundamentals (growth grade higher than value) or stocks that have yet to catch up to a successful fundamental story (value greater than growth).

First, for readers not familiar with MarketGrader’s grading methodology and ratings, it’s worth summarizing how these work in order to better understand the different profile grades. MarketGrader grades 24 individual indicators for every company it covers. These are grouped according to the four categories of our fundamental analysis: Growth, Value, Profitability and Cash Flow. While each one of the 24 indicators is assigned a letter grade, from A+ to F, each grade is assigned a numerical equivalent, which we then use to calculate the company’s overall grade. This means that a company with A+ grades across the board would receive a perfect grade of 100 (while we’ve had plenty of companies graded in the 90s, we have never had a company with a perfect score of 100). The resulting numerical grade determines MarketGrader’s rating for every stock under coverage, with all companies graded 60 or higher receiving a ‘Buy’ rating, all companies in the 50-59 range a ‘Hold’ rating and all companies scoring 49 or lower getting a ‘Sell’ rating. We call this our ‘Balanced’ rating because it incorporates, in different weights, all four categories of our analysis.

Within MarketGrader a user may elect to change the MarketGrader rating by emphasizing growth or value with our Profile Rating Change feature. By selecting ‘Growth’ or ‘Value’ from our ‘rating box,’ the overall grade of 0-100 gets recalculated based on the selected profile, and in many cases the rating changes. For example, Netflix (NFLX), has been rated ‘Buy’ in MarketGrader since April of 2007. Today the company has an overall grade of 72.7. However, considering the remarkable performance of the stock, which is up 622% in the last three years and 221% during 2010 alone, a clear divergence has emerged between our growth and value indicators. Our composite grade for its six Growth indicators is A- while our composite Value grade is D. This divergence is nowhere more evident than in the spread between our Growth and Value profile grades. When I select ‘Growth,’ the overall grade climbs to 86.5; when I select ‘Value,’ the grade falls all the way to 44.3 and the rating changes to ‘Sell.’ The difference between these two grades, or the spread, is therefore 42.2! For investors who have owned the stock for a while and have enjoyed a remarkable run-up this might be a good indicator that it’s time to take some profits off the table. However, keep in mind that based on our ‘Balanced’ grade, our rating on the stock is still a solid ‘Buy.’s latest report: ‘NFLX.2010.

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