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Hedgie: 2 Hot Momentum Stocks Way Ahead of Themselves

Two popular hot momentum stocks are just ripping and they’re getting way ahead of themselves

So says famed value investor Whitney Tilson of T2 Partners. And when Tilson talks shorts we listen – after all he profited handsomely by shorting the homebuilders ahead of the subprime crisis.

Open Table

Tilson suggests a short position in restaurant reservation website Open Table, a company that he admits has a good business, with a good management team and a leading market position.

They why short?

”Generally I don’t,” he admits, "unless the valuations get truly extreme.” And Tilson thinks valuations here are way overdone in Open Table .” It just got caught up in all the momentum.”

”Open Table is trading at 164 times trailing earnings, 70 times next years estimates and 18 times sales. I just don’t see any way the company can grow into these valuations,” he says.

So how far does he expect the stock to fall. Pretty far.

”Fair value is well south of a 50% decline. I think intrinsic value is in the mid-20’s. That’s fair value for a good company,” he says

Netflix

Pick your jaw up off the ground, you read that right – despite all the short interest already and the fact this stock defies gravity Tilson also thinks Wall Street darling Netflix is a short.

”Netflix is like Open Table,” he says. “It’s a good business but the valuation is very extreme and we think the transition to a video streaming business model is going to put a lot of pressure on their margins,” he explains.

”Last quarter the stock ripped upward but sequentially earnings went from 80 cents down to 70 cents. Sequentially declining earnings; that doesn’t make any sense to me.”

Also he sees costs at Netflix increasing. "We think they're going to have to pay up for streaming content.

They're currently paying an ultra-low price for most of their streaming content. They get their best content from Starz and we think they're going to have to pay 8 to 10 times as much as they're currently paying when that contract gets renewed."

Again, how far does he expect the stock to fall?

”It should probably trade at 20 times earnings and it right now it trades at 67 times earnings,” he says.

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TAKE YOUR POSITION:

Earnings season marches on next week with 87 S&P companies reporting. Take a look at some of the market movers that release profit reports.

Day Company
MonAnadarko, Petrohawk Energy, Humana
TuesArcher Daniels, BP, Pfizer, Mastercard, Newmont
WedAetna, Agrium, Molson Coors, Qualcomm, CVS, Well
ThursApache, DirecTV, Unilever
Fri Berkshire Hathaway, CF Industries, Kraft

What should you be watching?

I’m watching Kraft, says JJ Kinahan. It seems to me everything is clicking on all cylinders and I’m long into earnings.

Newmont is on my radar, says Pete Najarian. I expect their numbers to be extremely impressive. It’s a bullish play.

Although we may hear a strong report from Humana , I’m a seller of health care, says Steve Grasso. I expect to see investors rotate out of names that depend on Medicare and Medicaid over the next month.

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FAST FLASH: RIM

Shares of RIM traded 15% higher this week, touching their loftiest levels in over 2 months.

How should you position now?

Options in this stock have been extremely active, says Pete Najarian. I’m seeing a lot of investors go for the upside so the move higher may not be over.





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Trader disclosure: On October 29th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian owns (ECA) call spreads; Cortes is short (AAPL); Cortes owns (GOOG); Cortes is short (RSX); Cortes is long S&P 500; Cortes owns (K); Cortes owns (TSN); Cortes is short Euros; Cortes is short crude oil; Cortes is short gold; Cortes owns U.S. Treasuries; Kinahan is long (KFT); Kinahan is long (MSFT); Kinahan is long (NFLX) options; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

For Steve Gasso:
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (MGM)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (OPEN)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)
Stuart Frankel & Co and it’s partners are short (AAPL)
Stuart Frankel & Co and it’s partners are short (MCD)


For Whitney Tilson
Funds Managed By Whitney Tilson Own (MSFT)
Funds Managed By Whitney Tilson Own (BP)
Funds Managed By Whitney Tilson Own Berkshire Hathaway
Funds Managed By Whitney Tilson Are Short (OPEN)
Funds Managed By Whitney Tilson Are Short (COF)
Funds Managed By Whitney Tilson Are Short (NFLX)


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