Who’s Buying What

Hollywood Story. Amid chatter that the firm’s earnings were unsustainable, shares of online and mail-order movie maven Netflix (NSDQ: NFLX) pushed to new all-time highs in late January. The company posted stronger-than-expected growth in several key areas. Fourth-quarter earnings grew by 52 percent year on year to $47 million, while revenue jumped 34 percent to $596 million. The firm also surpassed 20 million subscribers in the closing hours of 2010.

Netflix announced that because its earnings had grown difficult to predict–the firm in 2010 almost doubled its subscriber growth forecast–it would forego a full-year earnings forecast.

Nat Schindler of Bank of America Merrill Lynch said Netflix’s earnings growth won’t slow down any time soon, and upgraded Netflix to a ‘buy’ from ‘underperform.’

However, he voiced concerns about the sustainability of the company’s blockbuster growth. The bulk of new subscribers pay less than $8 per month for unlimited video streaming, raising questions as to how much they’ll actually contribute to the bottom line.

Additionally, the contract with Starz Entertainment that allows Netflix to stream Starz content on demand is up for renewal this year. Industry watchers speculate Netflix will have to pay dearly to renew the contract, which could deal the company’s profitability another blow.

The space is also growing more crowded with a bevy of new entrants such as Google TV, Apple TV and Hulu.com, which is expected to have an initial public offering this year.

Despite these potential challenges, a number of analysts have jumped on the Netflix bandwagon.

Surprise! Surprise!

Spice It Up. McCormick & Co. (NYSE: MKC) kicked it up another notch in the fourth quarter. The famed manufacturer and marketer of spices, seasonings and specialty foods, produced its seventh consecutive positive earnings surprise.

Driven by solid 5.9 percent growth in net sales, fourth-quarter earnings per share totaled $0.99, a 9 percent increase from the previous year. The company’s consumer business segment, which is responsible for the McCormick & Co. bottles in supermarkets’ spice aisle, posted sales growth of 5.6 percent. Industrial sales rose by 6.7 percent. The company’s overseas business also experienced strong growth, with Chinese consumer sales surging by 22 percent in the quarter.

Management forecasts 2011 sales to increase by 5 to 7 percent, generating earnings per share of $2.80 to $2.85. Strong growth coupled with a cash heavy balance sheet and reasonably low debt could also result in a dividend boost this year.

While other companies benefit from the continued economic recovery, strengthening spending power may work against McCormick. Sales of the company’s marquee products such as Old Bay, Lawry’s and Simply Asia seasoning blends grew strongly during the economic downturn as consumers dined out less in favor of cooking at home. Should consumers return en masse to restaurant dining, sales of these products could dip.

Inflation could also take a bite out of McCormick’s bottom line; the cost of cinnamon doubled last year and garlic prices surged by more than 300 percent. The company has already seen the cost of raw materials rise by about 8 percent.

The Checkup

Opportunistic. In the April 2009 issue of Louis Rukeyser’s Wall Street Jerry Jordan, portfolio manager of Jordan Opportunity (JORDX), spoke with associate editor Peter Staas about the value of keeping a cool head in the midst of a bear market. Jordan was bullish on the long-term prospects for technology and energy companies. He was also dipping into financials, as the sector grew more oversold.

Jordon took advantage of the pervasive pessimism surrounding the financial sector to pick up quality non-bank financials at extremely attractive valuations. Some of his bargains included CME Group (NSDQ: CME), IntercontinentalExchange (NYSE: ICE) and Franklin Resources (NYSE: BEN).

Shares of CME Group and IntercontinentalExchange–both of which operate trading markets for futures and derivatives–have since gained 29.2 percent and 53.3 percent, respectively. Both companies have struggled with weak trading volumes amid high volatility in commodity prices. Tighter regulation of speculation in the commodities market has also put a damper on daily trading.

Jordan’s investment case for Franklin Resources has proved sound. The investment firm has experienced continued strong growth in assets under management overseas. These gains have led the firm’s shares to rise by 126 percent since his initial recommendation.

Jordan’s energy plays have also performed well. Diamond Offshore Drilling (NYSE: DO) sold off sharply during the oil spill crisis in the Gulf of Mexico, leading to a mere 9.9 percent gain. However, his other two picks, Peabody Energy (NYSE: BTU) and BHP Billiton (NYSE: BHP), have both posted gains of more than 100 percent as global energy demand has recovered.