The Sharp Pain of the Overvaluation Sword Mike Larson | Monday, February 8, 2016 at 4:22 pm
Live by the overvaluation sword, die by the overvaluation sword.
That’s a painful lesson investors are learning these days, what with “FANG” stocks getting gored — and other overvalued tech stocks tanking.
You remember these stocks, don’t you? I wrote about the FANGs back in November when they were artificially propping up the averages. And I wrote back in September about the serious risk of a “Tech Bubble II.”
Now, we’re watching all those risks I highlighted come home to roost. Just since the beginning of the year, Amazon.com (AMZN) has fallen 27.4%. Netflix (NFLX) has dropped 27%. Alphabet (GOOGL) and Facebook (FB) have fared better thanks to strong earnings. But even there, the post-earnings pops are fading rapidly.
How about Linkedin (LNKD)? It just plunged $84, or 43.6%, in a single day after releasing lousy quarterly results. Corporate software darlings like Salesforce.com (CRM), Tableau Software (DATA) and Workday (WDAY) have plunged 31.1%, 60%, and 38.5% year-to-date.
Apple (AAPL) has lost 9.2%, while Qualcomm (QCOM) has dropped 11.7%. Even stodgier tech names like Intel (INTC) and Microsoft (MSFT) are down 16% and 11%, respectively.
Alphabet, or Google as it used to be known, has fared better than many other tech stocks because of strong earnings.
What’s going on? It goes back to what I wrote at the outset. When you live by the “momentum investing/who cares about overvaluation?” sword, you die by it. You can make tons of money in the boom phase of the cycle. But if you don’t dump your shares in time, you’ll get crushed in the bust phase.
I’ve been worried about exactly this kind of action. That’s one reason why I recommended an ETF designed to hedge against falling technology stocks in my Safe Money Report months ago. That position is working out well now.
More broadly, I believe the action in the riskiest of risky stocks is another negative for the market overall. They were the “generals” who led the market advance during the boom/bubble phase of the credit cycle. Now that we’re losing them, it’s hard to see the “troops” hanging in there for long. So again, I can’t stress caution enough in this volatile market environment. “I can’t stress caution enough in this volatile environment.”
But I’d very much like to hear from you at this time. Do you think the carnage in momentum stocks is a serious problem for the market? Or is this something that tends to happen at the end of a correction, rather than the beginning? Do you see value in FANG or other high-growth tech stocks here? Or do you think the sell-off is going to get even worse? Share your opinions below.
Poster Comment:
It is all about timing.