Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

As we have discussed in previous pieces, momentum investing is a strategy whereby investors rely more on emotions rather fundamentals to decide which stocks to include in their portfolio. Momentum stocks fare extremely well in times of market upswings that hype investor emotions, creating a virtuous optimism and euphoria that feed into the market hype; and extremely poorly in periods of market corrections when optimism and euphoria are succeeded by pessimism and panic — like the one we experienced in the last five weeks. So how did momentum stocks fare? Is it time to buy, sell, or stay away?

First, let us classify momentum stocks into categories; American and Chinese, and review how each group has fared during the correction. American momentum stocks are mostly concentrated into social media space, but they also come from all sorts of sectors, including clothing, carbonated drinks, restaurants, etc.; they have dropped anywhere from 11 to 30 percent.

Company*

Business

Most recent price

Percent correction from the end of July

Netflix (NFLX)

Video streaming

$210

-30(%)

Open Table (OPEN)

On-line reservation system

57

-25

Lululemon (LULU)

Athletic apparel

50

-12

Chipotle (CMG)

Mexican restaurant chain

292

-11

Soda Stream (SODA)*

Home beverage carbonation systems

35

-55

Linked In (LNKD)

Online professional network

75

-28

*Israeli based, but listed in NYSE.

Chinese momentum stocks are concentrated in the Internet and social media space. Some of these companies have made their way onto the U.S. exchanges, including Tudo (TUDO), that made its debut last week; have dropped everywhere from 17.5 to 40 percent.

Company*

Business

Recent Stock price

Percent correction from the end of July

Baidu, Inc. (BIDU)

Internet search engine

132

-20 (%)

Sina Corp (SINA)

Media and mobile value-added services

91

-18

E-Commerce China Dangdang Inc. (DANG)

Business –to-Consumer e-Commerce

8

-40

Renren Inc (RENN)

Social Networking

7.6

-23

Youku.com (YOKU)

Internet TV

$23

-20.41

Sohu.com Inc. (SOHU)

Brand advertising, on-line gaming

73

-17.50

Source: Yahoo.finance.com

Do these declines present a second chance for investors to jump into the momentum ship or a last chance to get out? With a couple of exceptions, e.g., companies with solid fundamentals and reasonable PEs like Chipotle, Soho.com, and Baidu, the answer is the correction is the last chance to jump the ship, as momentum is rarely regained. Thats the evidence from the bubble of the late 1990s. Ten years after the momentum faded, high fliers like (CSCO), Ciena Corp (CIEN), and JDS Uniphase (JDSU) are trading at a small fraction of their peak-bubble price.

Source: Whether It's Time To Buy U.S. And Chinese Momentum Stocks