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.
In recent weeks we have seen some deterioration within these leaders. In the chart below of the Global X Social Media ETF (NASDAQ:SOCL) you can see that it is beginning to underperform the S&P 500 (NYSEARCA:SPY) and has been moving lower over the past week even as the S&P 500 continues to hit new all-time highs.
We are seeing similar weakness in Telsa Motors, the front-runner for top story stock of 2013.
It has failed to hit a new high with the S&P 500 over the past two weeks and its relative performance against the S&P 500 is deteriorating. It is also possibly forming a bearish technical chart pattern known as a head-and-shoulders top.
Overall, investors should take note of the message the leaders are sending here. Their weakness could be an early sign that traders are beginning to lose faith in the "story."
With stocks like Telsa trading at 267x this year's earnings, the maintenance of faith is very important. Without it, they can fall very quickly as we have seen in the past.
At the very least, then, fragility in the story stocks is a cautionary signal with the potential for greater significance if this weakness persists. The models my firm uses for managing our mutual fund and separate accounts are currently in long-duration bonds, reflecting a more cautious outlook until the environment for equities becomes more favorable.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter