Momentum names may see more pain

NEW YORK Fri Apr 4, 2014 9:08pm EDT

A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York April 4, 2014. REUTERS/Lucas Jackson

A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York April 4, 2014.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) - After their worst week in several years, high-flying stocks that defied gravity throughout 2013 look like they're in for more punishment. The reason: Despite the plunge, they still look overvalued.

Familiar names such as Netflix, Facebook and Tesla Motors, along with a number of biotechnology and cloud-computing stocks, have been pummeled in the last month. Some stocks are down more than 20 percent over that period, falling into their own bear market, and yet their valuations still far exceed those of the broader U.S. stock indexes. Wall Street defines a bear market as a drop of 20 percent or more from a recent peak.

Facebook Inc (FB.O), for example, has fallen nearly 22 percent from an intraday record reached less than a month ago. The stock was still up nearly 3.8 percent for the year at Friday's close. Among biotech names, Alexion Pharmaceuticals (ALXN.O) has declined 23 percent from a February 25 intraday high, and yet the stock on Friday was still up 7 percent for the year.

Facebook still traded on Friday at a price-to-sales ratio of nearly 20, making it the most expensive in the S&P 500, which has an overall price-to-sales ratio of 1.7. The other companies with expensive valuations read like a Who's Who of so-called momentum stocks, including Regeneron (REGN.O), Alexion, TripAdvisor and Vertex Pharmaceuticals (VRTX.O).

"There's value somewhere, but since these things aren't being traded off typical valuations, you can't go by those metrics, and it's more about when do you find that stability," said Mike O'Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.

The price-to-sales ratio is the way to value a stock by looking at its market capitalization in comparison to its sales over a 12-month period.

The declines have come at a time when investors overall are seeing a general improvement in economic figures, including Friday's nonfarm payrolls data, which showed strong job gains in March and more people moving into the labor force.

On Friday, the Nasdaq lost more than 100 points even though the S&P 500 briefly touched another intraday record.

TEPID EARNINGS FORECAST

Expectations for earnings have come down for the first quarter, but investors are hoping for an improved outlook for most of the S&P 500. That may cause the rotation away from hyper-growth to steady growth to continue.

Earnings season begins next week with reports from Bed Bath & Beyond (BBBY.O), Wells Fargo & Co (WFC.N) and JPMorgan Chase & Co (JPM.N).

First-quarter S&P 500 companies' earnings are projected to have increased just 1.2 percent from a year ago, Thomson Reuters data showed. The forecast is down sharply from the start of the year, when growth was estimated at 6.5 percent.

"I'm not concerned about this spilling over to the broader market. We've been in a trading range, finding resistance at record levels, so this isn't cause for alarm," said David Joy, chief market strategist at Ameriprise Financial in Boston, where he helps oversee $703 billion in assets under management.

"I think there are bargains to be found, just not in the names that are getting hit. Financials are attractive here, as are industrials. The more mature tech names, especially on the software side, look valuable," he said.

The interest in speculative plays hasn't entirely eroded. Four different companies made their debuts on U.S. exchanges on Friday, and all four ended their first day higher, with the most notable being online food delivery service GrubHub Inc (GRUB.N), which shot up 31 percent.

However, for those concerned that the selling in biotech, Internet retail and other trading-crowd favorites will spill over to the rest of the market, Friday was a bit worrisome. The S&P 500 gave up early gains to end the day down 1.25 percent.

"If the weakness here cascades into other sectors, that would indicate a fundamental shift in the market. If things keep rolling over, you might want to seek protection or examine your fundamentals," said Michael Matousek, head trader at U.S. Global Investors Inc in San Antonio, which manages about $1.3 billion.

OVERSUPPLY

Since stocks like Netflix carry valuations far above most of the market, some investors are reluctant to buy them now.

"For momentum stocks to work, you need people to believe they can go higher," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

O'Rourke pointed out that while many of these stocks are actually still up for 2014 on an absolute basis, buyers this year are underwater, based on the shares' volume-weighted average price (VWAP).

The VWAP is a measure of the average cost of a stock for a particular period.

Facebook, for instance, had gained 9 percent in 2014 as of Thursday's close. Going into Friday, investors who bought the stock this year were on average down 6 percent on a VWAP basis.

"They bought at the wrong time, based upon where the shares are now," he said. "This also means there is a high likelihood there will be overhead supply when the shares rally as investors seek to unwind the losing trades."

In the options market, investors used the opportunity to exercise some caution. Amazon.com (AMZN.O) attracted trading volume at more than two-and-a-half-times the recent daily average volume. The most active option contracts were put options expiring next week that protect against the stock falling below $320, suggesting some hedging against losses.

Options trading volume for TripAdvisor (TRIP.O) surged to nearly three times the recent average. Put options outpaced calls, with 8,841 calls and 9,832 puts traded on Friday.

(Wall St Week Ahead runs every Friday. Questions or comment can be e-mailed to angela.moon(at)thomsonreuters.com)

(Editing by Jan Paschal)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
Alexaisback wrote:
.
. OK. D.O.K.E.Y. Yellen to the rescue. Just Print More

. Simply add 100,000 part time jobs serving food

and ship 1,000,000 full time jobs oversea.

. But then you realize
.
. PEAK EMPLOYMENT The US has reached peak employment and there is no way our
children will earn enough to pay for themselves much less the bills we are leaving them.

Austerity or sacrifice – call it what you want, voluntary and imposed is guaranteed.

- robotics technology has replaced the need for many workers.

- While the US has been reliant on proprietary information, intellectual property, for many years

that has all been shipped out too.

. Mexico, China, Vietnam, anywhere and everywhere the technology and proprietary information is shipped
or stolen and the
labor is 1/10 the price, with regulations 1/10, environmental 1/10, union 1/10 etc.
.
. PEAK EMPLOYMENT in the US has been reached.

. Simply add 100,000 part time jobs serving food

and ship 1,000,000 full time jobs oversea.

Apr 04, 2014 10:00pm EDT  --  Report as abuse
Kelly15 wrote:
Amazon has recently launched Amazon Fire TV, a set-top box for gaming and streaming TV and music. The amazon’s product has simplified media streaming, now its success depends on the company’s ability to tackle huge risks as there is an intense competition in the market currently

Apr 05, 2014 1:02am EDT  --  Report as abuse
no_free_lunch wrote:
The media’s definition of momentum stocks are those that surge upward on popularity buying. They forget about the downward momentum side of that equation.

Apr 05, 2014 9:28pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.