- Many of the high flying social stocks of the past 12 months are deteriorating fast.
- Their tumble has nothing to do with their business model, but that they are too rich.
- So much is baked in the cake of many social stocks, that if we see a general market correction, they will continue to fall.
You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time - Abraham Lincoln
Or put it in another way for the sake of our conversation ....
A bubble stock can fool some market participants all of the time, and the entire market some of the time, but a bubble stock cannot fool all market participants and the entire market all of the time - Me Myself and I
I have been on the record longer than I can remember stating that this market is out of touch with reality. Not all aspects of the market, but the social space is one of these segments. People have come to believe that many of the stocks in the space can defy gravity and simply go up forever.
It does not matter if companies lose or make money, or even if they never made any money at all. As long as analysts come up with some kind of a strange formula making a case for many of these stocks, people have been buying as if there is no tomorrow.
The case has always been that stocks in the social space are growing very fast and deserve their astronomical premiums. Well I beg to differ. There is a big difference between a premium, and an astronomical premium. And most of the stocks that are in the daily spotlight today trade at astronomical premiums.
One of these stocks is LinkedIn (NYSE:LNKD):
Yes, LinkedIn is growing fast. But guess what, even after the recent tumble, this stock still trades at an astronomical P/E of 750 (trailing), an astronomical Price/Sales ratio of 14, and just about every metric you can think of.
Another is Twitter (NYSE:TWTR).
Twitter is a stock that I have warned about many times. And guess what, if you are a buy and hold investor, with the exception if you bought Twitter in the IPO or the first 10 days after it began trading (or if you sold short at higher prices), you are losing money. In other words, most people who have bought this stock after its IPO are losing.
And no wonder, with a forward 12 month P/E of 200 and a Price/Sales ratio of 37 (even after this correction), unless you day trade, it is very difficult to make any money over the long term.
And let's not forget the locomotive of the entire social space, Facebook (NASDAQ:FB).
Facebook shareholders are actually doing better than most. So far they have only lost this year's gain. As to where the stock might settle is impossible to say. However please note that Facebook is also trading at stratospheric multiples, with a trailing P/E of 92 and a Price/Sales ratio of about 20.
These are not normal metrics folks. And while I am all for swing and day trading this market (if you have a talent for it), you will get hurt if you believe the rhetoric about paying pie in the sky multiples for growth. Yes growth comes at a premium, just not at an astronomical premium.
But these are not the only stocks that have corrected recently. Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) are both stocks that I have also warned against buying over the past several months. Both of these stocks have deteriorating fundamentals for several quarters now, but for some reason, investors just kept buying betting on the greater fool theory.
And don't look for bad news as a hint of when to sell these stocks. Very expensive stocks don't need bad news to fall, and can fall for no obvious reason whatsoever. In fact they can even tumble on good news. The market is well aware of the fundamentals and the fact that many of these stocks are trading at stratospheric levels. Follow the price action on the charts. When you see them falling but can't figure out why, don't worry about trying to find a reason. Sell first and investigate the reasons later.
Finally something else. Please take note that the market has not corrected yet. If the S&P takes a 10%-15% tumble (and eventually it will), these stocks will keep falling. So much is backed in the cake, that it only takes a change of sentiment towards high risk stocks and they could fall apart. Only when sentiment is such, that the greater fool theory becomes a fashion statement again, will these stocks be safe to buy once more.
But the next time around, chances are that Investors will have learned their lesson and most of these stocks will probably not trade at astronomical multiples in the future. Microsoft (NASDAQ:MSFT) is a very good example. On December 31, 1999 Microsoft had a market cap of $606 billion and today its market cap is $340 billion.