Momentum Stocks Are Falling; Is This A Correction Or Something More?
2013 was a banner year for the stock market. Alongside record-breaking advances for the S&P 500, big name technology stocks booked monumental gains. Driven largely by heavy investor interest and sizable expectations for future performance, the stock prices for companies such as Facebook, Yahoo, Netflix and Tesla were propelled to new heights. Despite improving financials for a number of these big names, many of the price movements were the result of expanding multiples and not fundamental improvements.
So far in 2014 however, momentum names have hardly continued their ascent up the charts. Over the past week high-profile technology stocks have seen substantial price declines, spurring discussions of bubble like behaviors. At the close of the trading week ending Friday the 4th, LinkedIn shareholders had seen their shares decline 13%, while Twitter and Facebook had fallen 8.8% and 5.4% respectively. This rough recent run has ended with prices for shares of Facebook, Netflix and Yelp all falling over 20% off of recent highs.
Analysts seem to fall into two categories on the issue. While many suggest that the irrational valuations of momentum names are finally beginning their descent back to earth, others, including Oppenheimer Analyst Jason Helfstein views this recent sell off as an opportunity to buy in. Helfstein upgraded Yelp and Netflix to Outperform on Monday citing unchanged near term fundamentals and upside potential.
So where do we go from here? The week of April 7th will be a busy one for market news and may provide some indication of what is to come. In addition to the Wednesday release of Fed minutes, IMF and World Bank meetings, along with the beginning of earnings season will give traders some new signals on interest rates, earnings and the overall strength of the markets.
What do you think? Is the momentum melt down creating strong entry points or is it best to stay away? Is the current IPO boom a sign of a frothy market? Will the coming end of QE keep the S&P headed downward? Let us know what you think in the comment section below.
I am hopeful this is a little correction and that IPOs and reports this week will help lift markets ahead of the easing that seems sure to happen this year. 2014 will be rockier than 2013 for sure. Just growing pains.
These have been some hard sell-offs, not that pansy flap around a few basis point shit. Tech and small/mid caps are weak as hell, S&P just still trying to hang on. I want to say we're entering into a correction/consolidation mode. Valuations across the board are at retarded levels and are just begging to come on in
Totally agree with the valuations on some of these tech stocks. In a few weeks I could see these as huge value plays especially in the case of TWTR coming close to its 52 wk low.
You keep using that word. I do not think it means what you think it means
Please give us a call when TWTR is trading at 15x earnings or has a price/book ratio below 1.5. Looks like we've still got a long way to go.
Thanks,
Value Investors Everywhere
PS: I am not saying Twitter is going to keep sinking; I am just saying that buying on the hopes it becomes a value play is a terrible plan. If you think Twitter is going to be attracting value investors in six months, you should short the stock.
Do you mean to tell me that a company with 700+ P/E was overvalued?!?!?!
This whole thread is hilarious.
I think there are serious issues with some of these stocks in a rising rates environment.
1.) These stocks don't pay dividends (duh, no problem- they're growth stocks) 2.) Some stocks- Facebook in particular- have been on a low-value acquisitions binge 3.) Shareholders in many cases don't have any say over dividend policy or what is done with earnings. 4.) Rates are going up.
In other words, the cost of capital is increasing, which is going to hit growth stocks- with most of its PV coming from cashflows way off in the future- a lot harder than value. Furthermore, shareholders are unable to force management to take corrective action. Zuckerberg's buying spree is going to continue and there is nothing shareholders (suckers) can do to stop his glamour spree. Every acquisition he makes dilutes your equity but not his control.
Without control, unless there is a reasonable prospect of Facebook paying a dividend, I'm not really sure what you're getting when you buy this stock besides helping Z buy the next cool startup for $10 billion in equity. I am not saying FB is going back to $20, but it's difficult to call a floor from a value perspective unless Zuckerberg starts acting like he cares about the price of Class A shares.
I was in high school back in 2000/2001, but I remember some of the surprise at the first 10% drop in Internet stocks. Today's tech stocks are doing better- they have earnings- but I'm seeing shades of the same disillusionment. And I think a case can easily be made for another 10-20% drop in the tech stocks on relative value.
I am thinking about buying Facebook puts tomorrow. Not because I think the stock is overpriced but because I honestly have no idea what it's worth, and outside of Zuckerberg, nobody else does, either. (Some of them just don't realize it yet)
I think the recent performance of these big momentum plays has been due to a few reasons. First, I think this is somewhat indicative of profit-taking in these names, especially in the face of a bleak outlook for "long" catalysts on the horizon for these companies (Twitter), and even in the face of what could be considered downside catalysts (Tesla's battle with state legislatures about dealerships, Facebook's apparent flippant spending). Second, and what I find to be more compelling, if not just interesting, this loss of momentum could be indicative of a pathological change in investor outlook within the marketplace. As others have said, the past few years have been characterized by extraordinarily easy access to capital by both companies and investors alike. I feel then that as this interest-rate environment continues to change, investors will seek out return in companies that will generate value away from pure high-speed top-line growth (marginal growth, efficient use of existing leverage, improving economic cyclical opportunities, etc.). Thus, I think this performance by momentum stocks in the recent past is indicative of what I believe will be a gradual shift by investors to seek a "middle" pocket of stocks between operational laggards that are wholly unattractive and these high momentum and high growth plays, even if they continue to generate growth in the short or medium-term.
To answer the original question of the post, I don't know if I would call this a total "correction" or what the IPO market says about the frothiness of the market, but as an investor who believes that we will see some marginal growth within the market this year (~10% or so), I am excited about the opportunity the recent performance by momentum names provides. I think that overall, this performance recently will somewhat ease the "doomsday" opinions of those who think this bull market is headed off a cliff and generate improved confidence in the pricing of the market, leaving room for growth across the board as earnings continue to be solid, the economy begins to improve, and consumer and investor sentiment continues to strengthen.
Let the world burn x) - Long vol/short liquidity.
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