The Momentum Bubble Is Back, But Will It Last?

by: Bill Maurer

Remember how a couple of years ago there were a number of debate stocks that were at really high levels? These names were called momentum names, because momentum kept pushing them higher, despite red flags, valuations, etc. The momentum party burst very quickly, and a number of these names experienced huge losses in a short period of time. Well, it seems the momentum party is back and in full swing, as a number of these names are at new 52-week highs, some even all-time highs.

Today, I'll discuss these names, reasons behind the rallies, and where these stocks could go from here. Four of the names chosen below were known as momentum names over the last couple of years. All four experienced huge declines from their highs, but I chose them because they have at least doubled, if not tripled or more, from their 52-week lows, as money is pouring into them quickly right now. One of them, the first one on this list, is a name that has rallied extremely fast in a short period of time, a name I expect will be considered as a momentum name going forward. All numbers in this article are as of Tuesday's close.

Tesla Motors (NASDAQ:TSLA):

The electric automaker raced to a new high on Tuesday before pulling back, thanks to a great first quarter report. As you can see from the chart below, Tesla's stock has seen one of the greatest weekly rallies in quite some time, rivaling another name that will make this list. Just in the past four days, Tesla went from $55.79 to a high of $97.12. That's a 74% rise in less than four days. At its highest point on Tuesday, Tesla had a market cap of more than $11 billion. Early in the day, it seemed like $100 could be coming very soon.

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Now it seems the Tesla party may have broken up, and quite quickly. By 10:35 on Tuesday, the stock was actually down about $2.00, a fall of more than $11 in about an hour. That fall continued later in the day, with the stock closing down more than $4.50 on the day. Tesla ended almost $14 off its daily high, and the day's trading range was about $16. The daily trading ranges in this name recently have been huge for a name that was in the mid $50s a few days ago.

SodaStream (NASDAQ:SODA):

The company that allows you to make your own soda at home has been off to the races since releasing its first quarter earnings report last week. Despite beating on both the top and bottom line, the stock pulled back initially, but those that took advantage of the pullback are now licking their lips. Those, like myself, that were looking at the sub $50 stock waiting for a pullback to $48 or even $45, are now kicking themselves and regretting inaction.

Shares of the name peaked on Tuesday thanks to two analyst notes. Oppenheimer raised their price target from $60 to $68. The firm believes that the company's growth strategy is just getting started, as SodaStream initiated a revenue target of $1 billion by 2016. That would be impressive, as current estimates call for just $558 million this year. Those estimates called for about $498 million when the year started, and I predicted that the company would do more than $525 million this year. I took that target up to $550 million after the Q4 report, and now I'm looking for more than $565 million. SodaStream continues to sparkle, and they raised their yearly guidance yet again. The second note was from Citigroup, which raised their price target to $66 on Tuesday.

On Tuesday, SodaStream shares rose $6.79, or 11.85%, to $64.08. This was the first rise above $60 since that amazing fall in August of 2011. Not only did the stock break through $60, but $65 as well, getting above $66 at one point. SodaStream shares have more than doubled from their 52-week low of $29.44, which you can see in the chart below.

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Green Mountain Coffee Roasters (NASDAQ:GMCR):

Green Mountain shares broke $80 a share on Tuesday for the first time since October 2011. It's been a tremendous rally for a company whose shares were barely above $15 about nine months ago. Strangely enough, revenue estimates since then have actually come down! The two year chart below shows just how volatile this stock has been. Green Mountain shares hit a high of $81.50 before falling back on Tuesday, closing at $78.39.

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Green Mountain announced a huge buyback program at that August report. The company has bought back nearly 8 million shares at just over $200 million, an average price of $25.32 per share. We are now at $80! Green Mountain still has about $300 million left on its buyback, which won't get as many shares as it would have a few weeks ago when we were in the mid $50s.

I recently covered Green Mountain's latest earnings report. Had it not been for the Starbucks (NASDAQ:SBUX) deal, Green Mountain shares would probably be around $50 now. Investors are willing to scoop up shares, despite the company missing on fiscal Q2 revenues (after guidance was well below expectations to begin with). Also, fiscal Q3 revenue guidance was very disappointing, and the company lowered its full year revenue forecast. No problems though, as the stock has soared since.

Netflix (NASDAQ:NFLX):

Everyone's favorite debate stock seems to keep defying the critics. On Tuesday, Netflix shares rose above $230. The stock hit a new 52-week high above $236, and closed around $234. The 52-week low is under $53. Like Green Mountain and SodaStream, this was a level not seen since late 2011, when Netflix completely split the DVD and streaming business and began to invest heavily in international expansion. The 2-year chart below shows how dramatic this rise has been, especially the part just in 2013.

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The issue with Netflix is determining a valuation. With Netflix back on the rise, I've been arguing that Netflix, like Amazon (NASDAQ:AMZN), should be more valued on a price to sales basis than a price to earnings basis. Both companies have ridiculous P/E numbers, but neither at the moment are actually trying to grow earnings in my opinion. Both are making so-called "investments in their future" which depress earnings for the time being. Netflix earnings are lowered when the company pours millions into new international markets, another one of which is coming later this year.

Thus, I disagree with the bear camp for the following reason. The bears state that Netflix is trading at a P/E in the hundreds and so the valuation is ridiculous. Netflix could easily change that by stopping its investment in content, both domestically and internationally, and earnings would certainly rise very quickly. That would bring the P/E down to a more "reasonable" level. However, at that point, the bears would then argue that Netflix is a short because revenue growth is slowing. You can't have it both ways. This is not heads you win, tails I lose.

In my opinion, you can't argue P/E here because they are sacrificing short-term earnings to build the brand and gain millions of new subscribers. As Netflix gains more subscribers, they may be able to get content prices under somewhat better control, and their Q1 domestic streaming gross margins showed significant improvement. At this point, until Netflix stops expanding, I think you have to value them on revenues and not earnings. If sub growth disappoints, take the stock down. But as soon as Netflix gets back to some profitability, they will just enter a new international market. That will pressure earnings, so don't be surprised if a few years from now, Netflix is a $6 billion a year revenue company with the same level of earnings.

First Solar (NASDAQ:FSLR):

On Monday, First Solar rallied through the $50 level for the first time in about 15 months. While this is an extremely impressive rally from the $11.43 low set in 2011, the five year chart below shows how this stock is still well off its all-time highs. The solar industry is not in favored status anymore, and First Solar is one of the best examples of that. This stock once traded for $317, and just last year was close to single digits!

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The latest jump came when First Solar issued positive guidance during its investor day. The company guided to 2013 revenues in a range of $3.8 billion to $4 billion and EPS of $4.00 to $4.50, far above a consensus of $3.15B and $3.46. That sent shares from $27 to $39 in minutes, and we've climbed another $10 plus since then. The stock has continued higher, even after a poor earnings number at the Q1 report on disappointing margins.

Analysts late to the party?

I always find it interesting to look at what the "professionals" say, those wall street experts that follow these names. Obviously, you are going to have analysts that disagree on a stock, where some will be bullish, and some will be bearish. But I always like to look at price targets, especially the average price target, to gauge where sentiment is on a name. For some names, like Apple (NASDAQ:AAPL), there is a huge disparity to the upside. Apple's price target range goes from $360 to $888, with the mean over $540, and the median around $530. Most analysts agree that Apple has a lot of upside from here.

But when we get to the five names I've discussed above, the consensus is the opposite. The table below shows Tuesday's close against the average target, with the corresponding upside (or downside here) to that target.

Four of the five names have price targets below where they are trading at currently. The only name that doesn't is Green Mountain, and it is one penny away from the target, and traded above it for most of Tuesday. It's possible that we could see further upgrades (like the SodaStream ones) in the coming days, but if these stocks continue to rally, they'll still be well above these targets.

Now most of these analysts believe that these names are going down from here. Does that seem logical? Well, you have to remember that analysts can be late to the party, because they constantly update their numbers when we get new ones. Often you will see an analyst raise their target on a name only after it has moved. We saw that a lot with Netflix after the fourth quarter report in January. At that point, an analyst might have been saying Netflix will go to $130 in a year, but after the huge Q4 surprise and strong guidance, the analyst raises their target to say $175. Investors don't like to see price target raises after the stock has jumped, but analysts are doing it because they have new information.

The importance of short squeezes:

When smaller names like these have sharp rises, there are often a few explanations that account for much of the rise:

  1. Results are coming in better than expected.
  2. New growth opportunities are found.
  3. Number one above leads to extra cash, allowing a buyback.
  4. The names were beaten down more than they should have been.
  5. Short squeezes.

In this section, I'm going to discuss number five, which is one of the biggest reasons many investors point to for sharp rises in a stock. While this sometimes can be true, it is sometimes hard to tell if a true squeeze has happened. Why is this the case? Well, think of the following example.

In late January, Netflix reported first quarter results that sent shares skyrocketing from $98 to $170 in three days. Everyone came out and said that improved results led to a massive amount of short covering, which resulted in a squeeze. However, the January 15th data on short interest for Netflix had 10.117 million shares short. At January 31, the short count was 9.715 million. That's only a difference of 400,000 shares. Sure, it is likely, almost probable, that a short squeeze happened at some point. However, many new short positions came into play, so the net result was a minimal move in short interest.

Now, if you look at longer term trend in Netflix, you see that short interest went from a high of 17.2 million at October 31st to a low of 7.5 million on March 25th. Over time, short interest has certainly come down, which has helped to boost Netflix shares over time. Yes, short squeezes can occur, but the data might not always show them. The true trend to watch is the longer term trend.

In all five of the names I've covered, short interest has certainly come down. The table below shows how much each name's short interest has come down from its high point over the last year. For most of these names, the highest point over the last year was reached in 2012. Only Tesla saw a high point in 2013, and that makes sense, given most of these names began their rallies last year.

It's nice to see how short interest has come down, and I will certainly like to see how Tesla's short interest fares throughout May after this huge rally. But the more important part may be how many shorts are still left. So the following table shows the number of shares short against shares outstanding and the float, with those last two numbers provided by Yahoo! Finance for each name. The percentage column shows short interest as a percentage of outstanding shares, as a float number was not available for Tesla.

Obviously, the percentage in terms of float is much higher, but these numbers are also very fluid. Green Mountain is in the process of buying back stock, so the share count could be lower. Some of the other names aren't buying back stock, so their share counts could be higher. The key here is that each of these five names still had at least 18% of their outstanding shares short at the end of April. That could lead to further upside from short covering.

Final Thoughts:

The momentum party is back, but is the bubble about to burst? Tesla's bubble seemed to burst on Tuesday, and Green Mountain dropped off in mid-afternoon as well. One thing is certain. All five of these names have hit new 52-week highs in the past two days. Tesla hit an all-time high, as the other names are still a fair amount from their all-time highs. With their recent rallies, they are getting closer however, except for First Solar which has a long way to go.

So has the bubble burst yet? Well, there are a number of competing factors. You have markets racing to new highs as money is flowing into the markets and central banks continue to print like there's no tomorrow. If the Federal Reserve keeps QE at full blast, more money will come in, and we will go even higher. Add into the picture the huge short interest in these names, and I don't think we've reached the top just quite yet. Now I can't guarantee that every name will still go higher, and Tesla may be evidence of that. For now though, the momentum trade is certainly working, and it will continue until it doesn't. The key is to know when that will be, and that's the million dollar question. One thing is probably certain. When the bubbles burst for many of these names a few years ago, it wasn't pretty. I don't expect it to be much nicer this time around.

(Author's Source note - all charts used in this article were taken from Yahoo! Finance, and each company's respective page on that site.)

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.