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Amazon and Netflix: The Hottest Stocks This Year


Last month, Amazon.com’s  "The Man in the High Castle" and Netflix’s "Jessica Jones"  launched on the same day. The two are fighting it out to be the most popular TV series of 2015.

The Internet companies that created the shows are in a real-time fight to be the best-performing large-cap U.S. stock of the year.

Netflix has surged approximately 160 percent this year, and  Amazon has jumped 115%—the  only two members of the S&P 500 to double in value.  As of Tuesday’s close, The index itself has hardly moved, increasing 0.2 percent.

Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds in San Francisco stated that,  "Theyre great companies, but very richly valued." He added, "Theres no question that investors who havent held those two names have been punished by not owning them."

Cuggino considered himself  one of those investors who by mistake avoided the two streaming giants this year. Hes worried that  Netflix and Amazon’s high cost related to earnings coupled with high operating expenses will be a problem when interest costs increase and capital costs upsurge.

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It is keeping Cuggino from making the jump because that remains a big risk going into 2016.The Federal Reserve System, which has kept its standard interest percentage at almost 0 percent ever since 2008, for the first time is expected to increase rates in more than nine years after it meets next week.

The risk of higher percentage has done nothing as of yet to prevent the Amazon and Netflix rallies. Amazon is up 32%  in the fourth quarter and Netflix has increased 23%,  the shares are ending the year with a big bang.

The two are going through a transformation.  Amazon is growing beyond e-commerce, becoming a giant in cloud computing and a developing player in consumer devices and digital content. In the meantime, Netflix, has moved from a mail DVD rental business to a video streaming company that produces its own content.

Amazon vs. Netflix

Combined, the two are probably the most disruptive forces in Hollywood, offering a big amount for exclusive shows that would otherwise be the property of HBO, Showtime or another network.

In October, Netflix is even taking on the movie business, releasing its first feature film, "Beasts of No Nation."

"Youve got to go where the audiences are going," stated Paul Palumbo, research director at AccuStream Research which covers digital media. "These platforms do reach a lot of people. There are a lot of cord cutters,"he further added.

Three of the ten most popular TV shows of the year are original productions from Netflix, according to the Internet Movie Database. "Jessica Jones," based on the Marvel Comics character, is the latest and highest rated. The others are "Daredevil," also from Marvel, and Aziz Ansaris "Master of None."

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Netflix entered the exclusive content market in 2013 with "House of Cards," followed by "Orange is the New Black. " Next year, the Los Gatos, California-based company will spend up to $1 billion to acquire or produce original content, representing about 20 percent of total expenditures, according to RBC analyst Mark Mahaney. The RBC analyst recommends buying shares of Netflix and Amazon.

Amazon is a beginner in the game, hopping in last year with shows including "Transparent" and "Bosch." IMDb ranks "The Man in the High Castle," which was released on Nov. 20, to go head-to-head with "Jessica Jones," as the second most popular show of the year. (IMDb is owned by Amazon.) The series, based on the novel by Philip K. Dick, is an alternative history of the U.S. after World War II.

Unquestionably, content for Amazon is a complementary business. Amazon produced $25.4 billion in third-quarter income, with 70% coming from electronics and general merchandise. Media revenue, which includes books and music, represented 21%,  

Amazon’s Jeff Bezos and Netflix’s Reed Hasting have been attractive bets for growing investors.

The sales of both companies  expanded 23% in the latest quarter from a year earlier and none is excessively worried with the costs. Amazon runs at an extremely low margin, losing money in three of the past six quarters. Netflix uses about two-thirds of income on content-related fees, and its marketing costs climbed 43% from the previous year.

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