Beware Of Falling High Priced Momentum Plays

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 |  Includes: CRM, CSOD, DDD, RAX, SSYS, TSLA, XONE
by: George Kesarios

The problem with this market is that certain valuations are so out of touch with reality that many people are puzzled as what the market is trying to tell us. For example, should a prudent investor buy into a hyped stock, or should he sell if he feels valuations are out of touch? In the good old days the answer would be to sell and lock in those profits and let other people take chances. At least that has been Warren Buffett's recipe.

But in the era of QE to infinity, things have changed and so have behaviors. And to be honest, no one really knows how things will eventually work out. One thing is for sure, the market is creating "super bubble stocks" that were a rarity in the past but today seem to be the mainstream. And while no one really knows how things will turn out for many of these "new age" stocks, nevertheless we can try to guess.

So my guess is that there will come a point in time where many stocks will just keep falling and falling for no apparent reason, with no news and with the fundamentals at the same actually getting better. Because many stocks are so much ahead of the fundamentals, they have to fall like a rock to reflect their true value.

In the meantime investors will be wondering why this is happening, and since most people don't bother with fundamental valuations at all, they will probably never know. No to mention many will buy the dip.

Let me remind readers that is what happened with stocks Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) over a decade ago. We actually had a taste of this phenomena over the past several days.

3D Systems (NYSE:DDD) fell from its high of almost $85 to $68.30 in just three trading sessions. There was nothing in the news to call for a correction. I simply assume that the smart money deceived to move along, before others decided to jump ship also.

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The same happened to some of the other stocks in the space. Stratasys (NASDAQ:SSYS) fell from $134 to a low of $108 before recovering today, and Exone (NASDAQ:XONE) fell from $64.70 to a low of $51.35. In fact Exone is already exhibiting sings of a long term downtrend, for it has already corrected once from $80 to $40 and now has a lower high. And If I am correct, it will probably register a lower low (below $40) in the future. As such, Exone is ahead of the other stocks in the space as far as the long term correction is concerned.

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Again, the reason has nothing to do with the company, but the absurd valuation investors have attached to the stock. The same goes for Cornerstone (NASDAQ:CSOD) and Rackspace Hosting (NYSE:RAX), while only Salesforce.com (NYSE:CRM) seems to be the only stock in the group holding up.

Must I remind readers of Tesla (NASDAQ:TSLA) also? If investors think that a small fire in a Tesla vehicle had anything to do with the stocks slide from $200 to $121 today, they have another think coming. It had absolute nothing to do with it. Tesla's valuation was the only reason for the stock's slide and nothing else.

P/E

Forward P/E

Price/Sales ttm

P/B

3D Systems

155

56

15

8

Stratasys

N/A

50

13

2

Exone

N/A

114

18

5

Cornerstone

N/A

N/A

14

45

Rackspace

59

53

3.75

5.6

Salesforce.com

N/A

108

9.2

11

Tesla

N/A

81

8.7

26

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My advice is to avoid all of the above stocks, if you are not a short term trader, momentum trader or day trader. If you are buying stocks for the long term and don't trade often, you probably don't want to own many stocks in the "new age" category. Because you might just wake up one and see them down by 80% on no news, while the fundamentals are actually getting better, and wonder what you did wrong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.