At the end of the year, markets are at the crosscurrents of all sorts of trends that magnify market volatility. This year, in addition to the usual January effect and the end of the year window dressing, markets are on the edge because of another trend, the ongoing European sovereign debt woes that have caused a major correction in the price of most stocks.
Particularly hard hit have been momentum “angels,” as they appeal more to the emotional rather than to the rational side of investors. Compounding the correction, some momentum stocks have problems of their own that have turned the tide on the short rather than the long side. This means that some momentum stocks have been unfairly penalized. They have turned into fallen angels—presenting a buying opportunity. At the same time, other momentum stocks have been fairly penalized. They are falling angels—presenting a trap.
To help investors distinguish between the two groups, we first classify momentum stocks into two categories, American and Chinese, and review which stocks have been fairly or not fully-penalized and which have been unfairly penalized or fully penalized. 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 15 to 40 percent.
Among the American momentum stocks, Netflix (NFLX), Open Table (OPEN), Lululemon (LULU) and Green Mountain Coffee (GMCR) have been fairly punished, as their fundamentals have shifted—they have disappointed investors in terms of their growth potential or the soundness of their business, while Chipotle (CMG) has been unfairly punished, as it trades at reasonable PEs, and its fundamentals remain intact. Another momentum stock Research in Motion (RIMM) may have been fairly punished because of a string of earnings and sales disappointments, but it is trading at a price that may be a good take-over target; it is a fallen angel.
Company | Business | Angel Status | Action |
Netflix | Video streaming | Falling | SA |
Open Table | On-line reservation system | Falling | SA |
Lululemon | Athletic apparel | Falling | SA |
Chipotle | Mexican restaurant chain | Fallen | B |
Research in Motion | Home beverage carbonation systems | Fallen | B |
Green Mountain Coffee | Coffee machines and supplies | Fallen | SA |
B: Buy
SA: Stay away
Among Chinese momentum stocks, Dangdang (DANG) and Renren (RENN) have been fairly punished, as they trade at an astronomically high PE and shaky fundamentals, Baidu (BIDU), Sina (SINA), Sohu (SOHU), and Youku (YOKU) have been unfairly punished, as they trade at reasonable PE and sound fundamentals.
Company* | Business | Angel status | Action |
Baidu, Inc. | Internet search engine | Fallen | B |
Sina Corp | Media and mobile value-added services | Fallen | B |
E-Commerce China Dangdang Inc. | Business –to-Consumer e-Commerce | Falling | SA |
Renren Inc ( | Social Networking | Falling | SA |
Youku.com | Internet TV | Falling | B |
Sohu.com Inc. | Brand advertising, on-line gaming | Fallen | B |
Source: Yahoo.finance.com
The bottom line: Investors should consider buying into momentum stocks that have been unfairly punished or fully punished, but stay away from momentum stocks that have been fairly punished or not fully-punished. That’s 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 peak-bubble prices.
