Why this value investor who runs a $275 million hedge fund returning 24% this year is betting on Netflix

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  • ValueWorks was up 11% at the end of May and has returned roughly 24% year to date. 
  • Founder Charles Lemonides believes Netflix is a “very solid” company with an attractive valuation.
  • Netflix is trading around $180 a share, a 74% drop from its high of $700 a share in November. 

Charles Lemonides is seeing the value of large-cap stocks that have felt the blow from the turbulent market cycle over the past month. 

Value money managers that focus on stocks that look cheap based on the company’s fundamentals are enjoying solid returns while other investing styles, like growth, get clobbered. Lemonides is no exception, his $275 million hedge fund, ValueWorks, was up 11% at the end of May and roughly 24% year to date. The average hedge fund lost 3% for the five months ending in May, according to Hedge Fund Research.

His fund’s top holdings include companies like Apple, United Natural Foods, Whiting Petroleum, and Qualcomm, according to ValueWorks’ first quarter investor letter. 

Lemonides told Insider he’s now looking at Netflix as a top bet. It’s a “very solid company, with a solid business outlook, a leader in its field, and has an attractive valuation,” he said.

The streaming service stock has traditionally been a favorite of growth investors, or those have are willing to pay top dollar for companies that are expected to grow quickly.

Netflix excelled during Covid-19 and was trading around $700 a share back in November, but now its share price has tumbled to around $180 a share after revealing its first fall in subscriber numbers in May as well as being a victim of the wider tech stock sell-off.

Lemonides said Netflix bought shares at $225 and predicts in two to four years the stock will be up 50% or 100% from its highs. 

Netflix is a “good poster child for the opportunities that are being created. There’s going to be a big difference between the winners and the losers, and not every stock that was perceived as a great growth story, really was a great growth story,” he told Insider.

ValueWorks believes Netflix’s streaming penetration, in terms of paid subscribers, can grow 50% more in the US, and if global penetration rates mirror those in the US, that could represent another increase of over 100% in subscribers, he said. 

Tech-focused hedge fund Coatue Management is also keeping Netflix on its radar, as Insider reported earlier this month. 

Oil and gas as an inflation hedge

Lemonides also thinks that the energy sector is attractively priced since oil has been at record highs for the past few months and doesn’t believe prices will drop anytime soon. 

ValueWorks’ portfolio includes energy companies like Whiting Petroleum, Oasis Petroleum, Volaris, and Mammoth Energy. 

Oil and gas, Lemonides said, is “probably very underweighted in the S&P in terms of total value, and it will probably provide us a lot of stability over the next 12 months as the markets gyrate. It’s a great inflation hedge.” 

While he’s buying up beat-up stocks, the value investor is still proceeding with caution as the markets and the economy will continue to have a rocky nine months. 

“We’ve got a number of years in front of us that are going to be really, really robust for the economy and the market,” Lemonides said. “But clearly, the near term is much more challenging because the Fed is tightening due to inflation.” 

The market suffered blows over the last few weeks, the worst it’s been since March 2020. US stocks bounced back this week, with the S&P 500 trading 0.5% higher Thursday morning, after dropping 5.8% last week. Last week, Federal Reserve chair Jerome Powell said will increase interest rates by three-quarters of a percentage point to help dampen inflation, which is at 40-year highs.

“Don’t expect to crush it in the next six months,” said Lemonides. “But be ready for a turn in the markets and the economy’s growth comes back to a manageable level, and hopefully inflation eases.”