There are only two emotions in the market - hope and fear. The problem is you hope when you should fear, and fear when you should hope
This is a famous quote from Jesse Livermore, a famous trader who made and lost millions in the market. I believe it is quite apropos at this juncture in the market. I posit the market is at an inflection point. As we all know, in life, timing is everything. Well, it works the same way in the market and the time is now to sell the following stocks due to macro and company specific headwinds.
How many high profile skyrocketing momentum stocks have you watched come crashing back to earth recently? The answer is a whole bunch. Netflix (NFLX) comes to my mind first off followed by Green Mountain Coffee Roasters Inc. (GMCR), Open Table (OPEN), Travel Zoo (TZOO) and Soda Stream (SODA). All pumped incessantly by Cramer during their huge runs and then left for dead when they ran out of steam. Many were part of his FADS CAN gimmick acronym; well I’m here to say FADS CANT because the definition of a Fad is a temporary fashion or notion followed enthusiastically by a particular group until it isn’t. This sounds eerily like momentum stocks and the traders that are captivated with them.
The following stocks are momentum stocks I see the tide turning on in the coming months. Therefore, if you have significant gains in these plays I would suggest selling now and if you are contemplating buying one of these stocks I would suggest avoiding them at this time.
The following are the seven momentum stocks in question: American Tower Corp. (AMT), Amazon.com Inc. (AMZN), Chipotle Mexican Grill, Inc. (CMG), Salesforce.com (CRM), Groupon, Inc. (GRPN), LinkedIn Corporation (LNKD) and Panera Bread Co. (PNRA). I will give a brief description of the current market backdrop which may provide major headwinds for these stocks and then scrutinize each stock independently.
Current Market Backdrop
An afternoon buying spell facilitated stocks off session lows Monday, although the general market still took a substantial beating as investors fixated on the daunting challenges in front of eurozone bureaucrats and a substandard projection from Intel (INTC). Apprehensions about the macro state were rejuvenated first thing in the morning as market partakers processed data that specified China experienced a slowdown in export growth during November, which many viewed as a symbol of a slowdown in the country that has been the engine of the global economy.
Eurozone euphoria quickly dissipated as participants shifted their focus from the significant step of getting a deal signed to the daunting task of implementing the plan itself. Based on uncertainties that the sovereigns will continue to schlep sideways without genuine results, yields on the debt of nations in the eurozone fringe were sent higher. The region's major bourses were likewise chastised by traders, with the EuroStoxx 50 falling about 1.6%. Exacerbating the situation was Intel with a disappointing outlook. The stock's 4% single-session slide pulled down the rest of the semiconductor sector with the Philadelphia Semiconductor Index shedding nearly 3%.
Current Performance Chart
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American Tower Corp. (AMT)
American Tower’s strength comes from commanding fixed rent increases on lessees to account for inflation. I foresee inflation rising rapidly over next few years as global central bankers churn out their fiat currencies in order to paper their way out of the current debt fiasco. The debasement of global currencies will negate these rent increases and negatively affect earnings. AMT is currently vastly overvalued with a price to earnings of 84.6 and a PEG ratio of 4.1. A PEG of two or greater is considered rich. AMT recently revised earning downward by one cent to 36 cents a share.
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Amazon.com Inc. (AMZN)
It appears Amazon’s latest endeavor, the Kindle Fire, is not receiving rave reviews and could be the straw that breaks this camel’s back according to a recent article in the New York Times. With Amazon's sky high fundamentals, the market may not be very forgiving of an earnings miss a la the Netflix debacle. Please read the following short excerpt.
The Kindle Fire, Amazon’s heavily promoted tablet, is less than a blazing success with many of its early users. The most disgruntled are packing the device up and firing it back to the retailer.
Many consumers have been critical of the Kindle Fire, complaining, for example, that there is no external volume control and the off switch is easy to hit by accident.
A few of their many complaints: there is no external volume control. The off switch is easy to hit by accident. Web pages take a long time to load. There is no privacy on the device; a spouse or child who picks it up will instantly know everything you have been doing. The touch screen is frequently hesitant and sometimes downright balky.
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High-flying Chipotle Mexican Grill ranks #2 on NPD's list of the fastest-growing restaurant chains in America (as measured by Y/Y customer growth), only trailing private burger chain Five Guys. Panera Bread comes in at #8. Nevertheless, their stock prices have gotten way ahead of each company’s respective growth with price to earnings ratios of 52 and 31 respectively; not to mention the vast insider selling. This restaurant momentum story has played out numerous times over the years and has mostly ending badly. A coming era of austerity may be just the thing to put a stop to this latest fad by having people turning back to Taco Bell of YUM! Brands, Inc. (YUM) and McDonald's Corporation (MCD) rather than paying high prices for so called healthy fast food. (These are three words I never envisioned hearing in the same sentence in the first place). I submit these two stocks may very well be the next momentum downward spiral victims and you should jump ship and invest in the companies that own Taco bell and Mickie Ds instead.
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Chipotle Mexican Grill, Inc.
Panera Bread Co.
The stock is now trading at $116. It has a market cap of $16 billion and a P/E ratio of 5777. Salesforce trades at over 10.5 times tangible book value and will lose money this year and the next. Seven insiders sold a significant amount of the stock during the past month. Now, I must say I love Chairman & CEO Marc Benioff, he is an extremely charismatic and confident leader, but you have to be kidding me with this outrageous valuation. This cloud play is reminiscent of the dot com boom of the year 2000, and we all know how that ended. Not to mention the competition is ramping up. Oracle (ORCL) and Microsoft (MSFT) are entering the fray and will inevitably cause profit margins to erode.
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Now these stocks are the reincarnation of the dot com boom, or dot con bust as I like to refer to it. I affectionately denote these stocks as sliver stocks based on the fact that the number of shares released on the IPO date was only a very small ‘sliver’ of the company’s total valuation. This was done to create artificial demand for the shares and cause a big splash when the shares hit the market. The fundamentals on these stocks are so high they are truly stratospheric. You can bet your bottom dollar insiders will be dumping shares as soon as the lock up date hits and soon after a secondary offering will provide significant dilution for current shareholders.
On top of all this, the competition is steep in these industries and the next best thing is just around the corner. Look at what happened to MySpace. It is already starting to occur for Groupon. I’m sure I don’t have to tell you about being inundated by coupon emails from local mimics, direct offers and Amazon’s horse in the coupon race. Regarding, Linkedin, yes I have a Linkedin profile, but I cannot remember the last time I check on it. I wonder how many other ghost profiles are on the site and more importantly how they are going to monetize them? I can’t keep up with all these social media sites! I have a real life to lead. You want me to update Facebook, Twitter, Google Plus, Linkedin and who knows what else, forget it, it’s not happening. I see social media fatigue soon approaching spelling doom and gloom for shareholders of these companies.
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Momentum traders chase upward trends in a stock’s price. They believe that these stocks will continue to soar due to the ‘momentum’ already behind them. The notion relies on the conviction that there are great quantities of traders willing to buy whatever stock is hot. Momentum investors do not essentially believe momentum stocks will prosper in the long run, nonetheless they do think in the short run individuals will continue to buy them, perpetuating the momentum. The problem is a momentum stock is hot until it’s not and by that time it will be too late. The risk is not worth the reward.