It was rough sailing for stocks on Friday with all major
indices taking losses. The Dow lost 0.96% while the S&P 500
shed 1.25% by the end of the trading day. But the biggest
sufferer was the Nasdaq, which closed the day 2.6% lower.
Internet, Biotech Stocks Take a Hit
This is the tech-heavy index's highest daily percentage loss
since February. The decline comes right after Thursday's loss of
1%. The index is now 5% lower than its highest close this year, a
milestone achieved on March 5.
More importantly, it was a cruel day for momentum stocks.
), electric car maker
Tesla Motors, Inc.
) and Internet radio service provider
Pandora Media, Inc.
) plunged 4.6%, 5.9% and 4.9%, respectively.
) and online travel company
) also plummeted. The stocks lost 3.2%, 4.9% and 6.1%,
Biogen Idec Inc.
Gilead Sciences Inc.
Vertex Pharmaceuticals Incorporated
) decreased 4.5%, 2.4%, 4.8% and 4.0%, respectively.
March's Trend Continues
This is a trend which has been continuing over the last month.
Several big names have lost more than 20% during that period. The
Street defines a drop of more than 20% or greater as a bear
market and it seems that these stocks have descended into one
which is their very own.
Alexion Pharmaceuticals, Inc.
) is 23% lower than its intraday high achieved on February 25.
Meanwhile, Facebook has plummeted from the intra-day record
achieved less than a month ago, losing 22% over the period. Yet
the social media giant has still gained 3.8% this year, while
Alexion is up 7% over the same period.
Are They Grossly Overvalued?
When using traditional valuation metrics, most of the momentum
stocks seem grossly overvalued. The forward price-to-earnings
ratios (P/E) for Amazon for the current financial year (F1) is
184.75. Netflix has a relatively modest P/E (F1) of 80.25. Tesla
stands in between the two at 162.
Several momentum stocks fare no better when using other
valuation metrics. Facebook has a P/E (F1) of 56.53, while its
price to sales ratio is 17.76. The S&P 500 has an overall
price to sales ratio of 1.7, which probably makes the social
networking giant the most expensive stock on the index.
Investors Grow Wary
The high valuation of these stocks seems to be the primary
reason for investors growing wary of them. The fact that most of
them are priced well above the market average are keeping away
potential buyers, probably rightly so. Momentum stocks grow on
bullish expectations and this seems to be in short supply.
Further, there remains a possibility that when these stocks do
rally, investors will sell. This is in order to make up for the
losses suffered in the interim since those holding these stocks
may feel at this point that they were picked up at the wrong
Earnings Remain Key
The earnings season will officially get underway this week
) reports its quarterly numbers. Earnings expectations for the
first quarter of the new financial year are on the lower side.
This is primarily due to the fact that a long and bitter winter
season has grievously affected several sectors such as
Additionally, there is some concern that the weakness in these
big name stocks will spread over into the larger market. This
seems unlikely and weakness in the broader markets may also be a
result of wariness ahead of earnings. Several analysts are of the
view that given the low level of expectations most companies will
beat the Street's estimates.
For now, however, investors are looking for bargains
elsewhere. These include industrials and financial stocks. Even
the older and more established tech companies are emerging as
good options. Momentum stocks may soon bounce back, but for now
earnings hold the key. Good results may help them greatly while a
slip up may keep them in the doldrums for a while longer.
ALCOA INC (AA): Free Stock Analysis Report
ALEXION PHARMA (ALXN): Free Stock Analysis
AMGEN INC (AMGN): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis
BIOGEN IDEC INC (BIIB): Free Stock Analysis
FACEBOOK INC-A (FB): Free Stock Analysis
GILEAD SCIENCES (GILD): Free Stock Analysis
NETFLIX INC (NFLX): Free Stock Analysis
PANDORA MEDIA (P): Free Stock Analysis Report
TRIPADVISOR INC (TRIP): Free Stock Analysis
TESLA MOTORS (TSLA): Free Stock Analysis
VERTEX PHARM (VRTX): Free Stock Analysis
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