So Much for Stories? What a Tesla Top Could Mean for All Stocks
Cracks in high momentum 'story' stocks are important to pay attention to, as even small dents may indicate that a decline in stocks overall is next.
-- Andres Serrano
Inevitably, all late-stage bull markets become enamored with a number of “story" stocks, where investors pay astronomical multiples for future prospects rather than current income and cash flow. The allure of these stocks becomes too great for retail investors to resist, as they can no longer stand to hear about friends and neighbors doubling and tripling their money in short periods of time.
In the '60s and '70s there was the “Nifty 50,” a term used to describe 50 popular large-cap stocks that traded at high multiples due to their categorization as solid, consistent earnings growers. In the '90s, there was the dot-com mania, where anything remotely related to the Internet was given a premium multiple. While a few of these story stocks did in fact grow into their lofty multiples over time, the vast majority failed to live up to great expectations.
In 2013, the story stocks are a mix of companies with “disruptive” technologies. These include social media companies like Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD), Yelp (NYSE:YELP), Pandora (NYSE:P), and Groupon (NASDAQ:GRPN); solar power companies like SunPower Corporation (NASDAQ:SPWR) and Solar City (NASDAQ:SCTY); online media companies such as Netflix (NASDAQ:NFLX); and electrically-powered vehicle companies like Tesla (NASDAQ:TSLA). All of these companies are up multiples of the S&P 500 (INDEXSP:.INX) this year, and are often referred to as market “leaders” or “momentum” stocks. As a whole, these companies can be good barometers of investor sentiment and risk appetite within a market. When they are rising and outperforming, it is generally favorable for the market and risk appetite; when they are falling and underperforming, it is often a cautionary signal for the overall market.
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