Tags: Irrational | Exuberance | Momentum | Stocks

'Irrational Exuberance': Momentum Stocks Look Ripe for Decline

By    |   Sunday, 20 Jul 2014 08:33 PM

If a stock market pullback is coming, it may be wisest to dump momentum stocks first, according to some market observers.

StreetAuthority noted that with the market near all-time highs, investors as savvy as billionaire activist Carl Icahn have been urging caution about U.S. stocks.

Another billionaire investor, David Einhorn, recently said he was short stocks with outsize
valuations, i.e., so-called momentum stocks that traders pile into because they are popular and keep going up and up without regard to their value.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

Street Authority said Einhorn hinted his short strategy took aim at tech stocks with negligible earnings that were trading above 10 times sales.

In that vein, Street Authority suggested Twitter, TripAdvisor and Zillow as three candidates for investors to sell or short now. “All three have price-to-sales (P/S) ratios above 15, and all three appear to be trading on irrational exuberance.”

Street Authority noted Twitter trades at a lofty forward price-to-earnings (P/E) ratio of 145, TripAdvisor has a P/E of 72, and Zillow has a forward P/E of 155 – all in nose-bleed territory by traditional value standards.

Forbes remarked on another momentum stock, medical marijuana company GW Pharmaceuticals, which has taken a dive recently. Forbes also mentioned Twitter, Splunk, Yelp and FireEye as momentum names that look vulnerable.

“With the stock market in general taking a pause, so-called momentum stocks have melted down in July,” Forbes said.

At CNBC, commentator Bob Pisani noted previous high-flyer Crumbs Bake Shop stock has
crumbled to penny-stock status, and that popular names like Groupon, Facebook, LinkedIn and Netflix trade at “silly” multiples.

“We all know that much of the growth in the last year — probably half — is due to multiple expansion rather than earnings growth,” Pisani wrote.

“You get multiple expansion when investors believe additional value has been created in a company. But with momentum stocks, at some point, multiples almost invariably get stupid.”

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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If a stock market pullback is coming, it may be wisest to dump momentum stocks first, according to some market observers.
Irrational, Exuberance, Momentum, Stocks
351
2014-33-20
Sunday, 20 Jul 2014 08:33 PM
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