The stock market has been dropping for weeks now. The market decline started when some investors realized that Washington had no leadership or control over the debt ceiling issue. Ever since that time, investors have had to endure the lack of leadership or a coherent plan from Europe over their own debt issues. This collective failure of leadership and strategy in both the U.S. and Europe has roiled global markets, and created a serious blow to investor and consumer confidence. At this point, these self-inflicted wounds are a done deal, and there appears to be little anyone can do to prevent a global slowdown. The U.S. Government has failed to create pro-growth policies and also has focused on treating symptoms of our failing economy rather than the cause, which is housing. The European Governments haven't had the will to face their problems and have always been a couple steps behind.
The market has lost patience with our economic leadership and in the last few days, even the stocks that were leading this market and able to withstand the pressure, have started to crack. This is most likely a sign that the stock markets will fall further in the coming weeks. As negative as all the news is, there is some upside. Once the leading stocks are sold off, markets might rebound as this could be one of the final steps needed for the overall market to reach a bottom. How much further the markets fall will depend greatly on how fast the wake-up call reaches policymakers. For example, the European Central Bank (ECB) was foolish enough to raise rates this year, and it should have reversed those rate hikes by now. China could also loosen monetary policy and an announcement that Europe and China have cut rates could create a significant global rally, especially if done on a coordinated basis. I believe many stocks are at or close to a bottom and there are many great buying opportunities. In terms of an overall market strategy, it makes sense to have cash, and not hold a large position in any single stock. Also, prepare on buying beaten-down stocks later this year as many investors will be selling them for tax loss reasons and pushing them down even further. Right now, risk management is critical for investors. Most of the stocks below are still very richly valued and are showing signs of weakness, which could indicate further downside. The problem is that some of these names were momentum stocks, which is great on the way up, but when momentum goes in reverse as it recently did in the case of Netflix (NFLX) it can be devastating for shareholders. Here are the stocks that until recently were holding strong and are now showing a strong chance of further declines:
Netflix, Inc. (NFLX) shares are trading around $113.27. Netflix is a leading Internet site for movie rentals. The 50-day moving average is $210.31 and the 200-day moving average is $225.49. Earnings estimates for NFLX are $4.48 per share in 2011, and $6.52 in 2012. The 52-week range is $107.63 to $304.79. Near the lows of 2009, NFLX traded for about $20 and rose to over $300, providing exceptional returns to investors. That is a great example of upward momentum. In the last few weeks, the stock has been a prime example of momentum in reverse. Netflix was one of the first market leading stocks to crack and it might be one of the first to put in a bottom. This stock could be close to the bottom now.
Baidu (BIDU) shares are trading around $106.91. Baidu is a leading Internet search site in China. The 50-day moving average is $141.01 and the 200-day moving average is $130.43. Earnings estimates for BIDU are $2.91 per share in 2011, and $4.40 for 2012. The 52-week range is $94.33 to $165.96. Near the lows of 2009, BIDU traded for about $10 and rose to about $165, providing exceptional returns to investors. This stock was a market leader but has cracked and in the past couple of weeks it has dropped from about $145 per share to just over $100. Like Netflix, this stock was one of the first to correct and it may bottom out first as well.
Chipotle Mexican Grill, Inc. (CMG) is trading around $302.95 per share. These shares have risen from a 52-week low of $171.24 and the 52-week high is $346.78. The 50-day moving average is $312.85 and the 200-day moving average is $276.63. The earnings estimates for 2011 are about $6.83 per share and $8.65 for 2012. This puts the PE ratio at well over 40, which is high for the restaurant sector. At over 40 times earnings, there is plenty of downside risk here. If sentiment turns on CMG shares due to valuation concerns, it could see a major drop just as Netflix and Baidu shareholders have recently experienced. Already the stock has dropped below the 50-day moving average and it wouldn't take much to see it break the 200-day moving average, which is key support level. There is no reason why this stock can't trade for $150 per share or less. Even at $150 per share, the stock would be trading at about 20 times earnings, which is close to double the current average PE ratio in the S&P 500 (SPY) Index.
Peet's Coffee & Tea, Inc. (PEET) shares are trading at $55.64. PEET is a coffee roaster and operates retail coffee shops. The shares have traded in a range of $33.20 to $63.99 in the past 52 weeks. The 50-day moving average is $56.54 and the 200-day moving average is $49.511. Earnings estimates for PEET are just $1.50 per share in 2011, so the PE ratio is almost 40. This stock recently broke below the 50-day moving average and I expect it to break below the 200-day average very soon. In this market, I believe anything over $30 per share is paying too much for this stock.
Caribou Coffee Company, Inc. (CBOU) shares are trading at $11.82. CBOU is a coffee roaster and operates retail coffee shops. The shares have traded in a range of $8.50 to $17.40 in the past 52 weeks. The 50-day moving average is $14.06 and the 200-day moving average is $11.34. Earnings estimates for CBOU are just 41 cents per share in 2011, so the PE ratio is about 30. This stock is now in a downtrend and it is only about 50 cents away from breaking below the key support level of $11.34, which is the 200-day moving average.
Amazon.com, Inc. (AMZN) shares are trading at $216.23. Amazon is a Internet retailing giant and is based in Washington. The shares have traded in a range of $151.40 to $240.44 in the past 52 weeks. The 50-day moving average is $211.78 and the 200-day moving average is $193.10. Earnings estimates for AMZN are $1.97 per share in 2011, and $3.22 for 2012. This is a great company with incredibly smart management, but at over 100 times earnings, investors are probably paying too much for the potential growth. Also, I share the concerns about the tax issue. Clearly, the fact that Amazon.com has been able to avoid charging many customers a sales tax is a huge advantage, but in time I expect this loophole will be closed by states needing tax revenue.
Whole Foods Markets, Inc. (WFMI) shares are trading at $69.05. WFMI provides premium and organic foods in supermarkets nationwide. The shares have traded in a range of $34.04 to $73.33 in the past 52 weeks. The 50-day moving average is $63.90 and the 200-day moving average is $59.83. Earnings estimates for WFMI are just $1.92 per share in 2011, and $2.25 for 2012, so the PE ratio is about 35. These shares appear ripe for a correction sooner or later at 35 times earnings. This stock would be reasonably valued at about $30 to $40 per share, and that level would still be a significant premium to other grocery stocks.
Green Mountain Coffee Roasters, Inc. (GMCR) shares are trading at $92.94. GMCR provides specialty coffee products. The shares have traded in a range of $26.14 to $115.98 in the past 52 weeks. The 50-day moving average is $101.22 and the 200-day moving average is $70.74. Earnings estimates for GMCR are just $1.65 per share in 2011, and $2.61 for 2012, so the PE ratio is about 65. These shares appear ripe for a correction at about 65 times earnings.
LinkedIn Corporation (LNKD) shares are trading at $78.08. The shares have traded in a range of $60.14 to $122.70 in the past 52 weeks. The 50-day moving average is $85.82 and the 200-day moving average is not available since this company went public recently. Earnings estimates for LNKD are 1 cents per share in 2011, and 38 cents for 2012, so the PE ratio is extremely high. I think investors are still enjoying the recent IPO status of this stock, and that is why some investors might not yet be properly considering the downside risks involved. I think this stock could drop more than 50% by year-end.
Data sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.