- High growth momentum sectors continue to rotate.
- This time, the SaaS space is in its initial decline phase on the back of the 3D and Fuel Cell space correction recently.
- The common denominator and main reason for the correction in all three sectors is rich valuations.
I had told you a while ago that the 3D space was due for a dive. Indeed, the space has been diving ever since, and if I am right, will continue to do so (please consider: Is The Long-Term Trend Of 3D Stocks Now Down?).
Then, I told you that the Fuel Cell space sector was also very overvalued, and it was also due for a correction (please consider: Why The Fuel Cell Bubble Has Popped).
And today, we have a situation where stocks like Plug Power (NASDAQ:PLUG) halved (in the wink of an eye), and others like Voxeljet (NYSE:VJET) -- from the 3D space -- are down about 65% from their highs. If I am right, most of the stocks in both the Fuel Cell and 3D spaces still have a ways to go (to the downside).
Now it has come to my attention that another high-flying sector that has been in the news for the longest time (and is just as overvalued as the previous two sectors) has also begun to correct. The sector I am talking about is the SaaS space (software-as-a-service).
Let's look at some charts before we continue.
As you can see, Cornerstone (NASDAQ:CSOD) has corrected from about $62 to $45, Workday (NYSE:WDAY) from $116 to $91, NetSuite (NYSE:N) from $120 to $91, Ultima (NASDAQ:ULTI) from $172 to $138 and Salesforce (NYSE:CRM) from about $67 to $55.
Obviously, every company is different, and we cannot put them all on the same boat (and every stock will correct differently), but there is something all these stocks have in common, and that is that they are not cheap (and that's an understatement).
Just as in the case of the 3D and Fuel Cell space, these stocks are running way ahead of their fundamentals, and when they miss by just a little of what the market expects of them, they crash. But sometimes they really don't need to miss. If the market corrects, high-flying momentum stocks are usually the first to feel the heat.
If you are asking me just how overvalued they are, here are some basic numbers that in no way tell the whole story.
Return on Equity
Jim Cramer, however, also has another theory as to why these stocks might correct. He says that if the upcoming IPOs of 2U (NASDAQ:TWOU) and Aerohive (NYSE:HIVE) -- two cloud-based companies that will debut shortly -- are not great successes, that might be a reason for other cloud companies to be worth less.
I will admit this has some logic, however, the common denominator is that the sector is simply ahead of itself. Because in my book, valuations are the Alpha and the Omega. Like I have said before, over the long term, having very expensive stocks in your portfolio (on a permanent basis) will at the very least make your portfolio underperform.
The bottom line is that it's okay to trade and play around with these stocks (either swing trading or day trading them), just as long as you realize how overvalued they are, and that at any time they might crash, if for any reason the market changes its mind concerning what it wants to pay for them.
Because when valuations get out of hand, then the greater fool theory applies. Unless you understand this, you are asking for trouble.