Familiar names such as Netflix, Facebook and Tesla Motors, along
with a number of biotechnology and cloud-computing stocks, have been
pummeled in the last month. Some stocks are down more than 20
percent over that period, falling into their own bear market, and
yet their valuations still far exceed those of the broader U.S.
stock indexes. Wall Street defines a bear market as a drop of 20
percent or more from a recent peak.
Facebook Inc <FB.O>, for example, has fallen nearly 22 percent from
an intraday record reached less than a month ago. The stock was
still up nearly 3.8 percent for the year at Friday's close. Among
biotech names, Alexion Pharmaceuticals <ALXN.O> has declined 23
percent from a February 25 intraday high, and yet the stock on
Friday was still up 7 percent for the year.
Facebook still traded on Friday at a price-to-sales ratio of nearly
20, making it the most expensive in the S&P 500, which has an
overall price-to-sales ratio of 1.7. The other companies with
expensive valuations read like a Who's Who of so-called momentum
stocks, including Regeneron <REGN.O>, Alexion, TripAdvisor and
Vertex Pharmaceuticals <VRTX.O>.
"There's value somewhere, but since these things aren't being traded
off typical valuations, you can't go by those metrics, and it's more
about when do you find that stability," said Mike O'Rourke, chief
market strategist at JonesTrading in Stamford, Connecticut.
The price-to-sales ratio is the way to value a stock by looking at
its market capitalization in comparison to its sales over a 12-month
The declines have come at a time when investors overall are seeing a
general improvement in economic figures, including Friday's nonfarm
payrolls data, which showed strong job gains in March and more
people moving into the labor force.
On Friday, the Nasdaq lost more than 100 points even though the S&P
500 briefly touched another intraday record.
TEPID EARNINGS FORECAST
Expectations for earnings have come down for the first quarter, but
investors are hoping for an improved outlook for most of the S&P
500. That may cause the rotation away from hyper-growth to steady
growth to continue.
Earnings season begins next week with reports from Bed Bath & Beyond
<BBBY.O>, Wells Fargo & Co <WFC.N> and JPMorgan Chase & Co <JPM.N>.
First-quarter S&P 500 companies' earnings are projected to have
increased just 1.2 percent from a year ago, Thomson Reuters data
showed. The forecast is down sharply from the start of the year,
when growth was estimated at 6.5 percent.
"I'm not concerned about this spilling over to the broader market.
We've been in a trading range, finding resistance at record levels,
so this isn't cause for alarm," said David Joy, chief market
strategist at Ameriprise Financial in Boston, where he helps oversee
$703 billion in assets under management.
"I think there are bargains to be found, just not in the names that
are getting hit. Financials are attractive here, as are industrials.
The more mature tech names, especially on the software side, look
valuable," he said.
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The interest in speculative plays hasn't entirely eroded. Four
different companies made their debuts on U.S. exchanges on Friday,
and all four ended their first day higher, with the most notable
being online food delivery service GrubHub Inc <GRUB.N>, which shot
up 31 percent.
However, for those concerned that the selling in biotech, Internet
retail and other trading-crowd favorites will spill over to the rest
of the market, Friday was a bit worrisome. The S&P 500 gave up early
gains to end the day down 1.25 percent.
"If the weakness here cascades into other sectors, that would
indicate a fundamental shift in the market. If things keep rolling
over, you might want to seek protection or examine your
fundamentals," said Michael Matousek, head trader at U.S. Global
Investors Inc in San Antonio, which manages about $1.3 billion.
Since stocks like Netflix carry valuations far above most of the
market, some investors are reluctant to buy them now.
"For momentum stocks to work, you need people to believe they can go
higher," said Kim Forrest, senior equity research analyst at Fort
Pitt Capital Group in Pittsburgh.
O'Rourke pointed out that while many of these stocks are actually
still up for 2014 on an absolute basis, buyers this year are
underwater, based on the shares' volume-weighted average price (VWAP).
The VWAP is a measure of the average cost of a stock for a
Facebook, for instance, had gained 9 percent in 2014 as of
Thursday's close. Going into Friday, investors who bought the stock
this year were on average down 6 percent on a VWAP basis.
"They bought at the wrong time, based upon where the shares are
now," he said. "This also means there is a high likelihood there
will be overhead supply when the shares rally as investors seek to
unwind the losing trades."
In the options market, investors used the opportunity to exercise
some caution. Amazon.com <AMZN.O> attracted trading volume at more
than two-and-a-half-times the recent daily average volume. The most
active option contracts were put options expiring next week that
protect against the stock falling below $320, suggesting some
hedging against losses.
Options trading volume for TripAdvisor <TRIP.O> surged to nearly
three times the recent average. Put options outpaced calls, with
8,841 calls and 9,832 puts traded on Friday.
(Wall Street Week Ahead runs every Friday. Questions or comment can be
emailed to email@example.com. )
(Editing by Jan Paschal)
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