Momentum Slide to Continue for Netflix, Facebook? - Analyst Blog

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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. Facebook, Inc. ( FB ), electric car maker Tesla Motors, Inc. ( TSLA ) and Internet radio service provider Pandora Media, Inc. ( P ) plunged 4.6%, 5.9% and 4.9%, respectively.

Meanwhile, Inc. ( AMZN ), Netflix, Inc. ( NFLX ) and online travel company TripAdvisor Inc. ( TRIP ) also plummeted. The stocks lost 3.2%, 4.9% and 6.1%, respectively.

Biogen Idec Inc. ( BIIB ), Gilead Sciences Inc. ( GILD ), Vertex Pharmaceuticals Incorporated ( VRTX ) and Amgen Inc. ( AMGN ) 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.

For instance, Alexion Pharmaceuticals, Inc. ( ALXN ) 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 time.

Earnings Remain Key

The earnings season will officially get underway this week when Alcoa Inc. ( AA ) 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 construction.

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 Report

AMGEN INC (AMGN): Free Stock Analysis Report

AMAZON.COM INC (AMZN): Free Stock Analysis Report

BIOGEN IDEC INC (BIIB): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

GILEAD SCIENCES (GILD): Free Stock Analysis Report

NETFLIX INC (NFLX): Free Stock Analysis Report

PANDORA MEDIA (P): Free Stock Analysis Report

TRIPADVISOR INC (TRIP): Free Stock Analysis Report

TESLA MOTORS (TSLA): Free Stock Analysis Report

VERTEX PHARM (VRTX): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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