By George Leong for Investment Contrarians
The more I view this stock market, the more nervous I get. While Wall Street gets set for some terrific year-end bonuses and investors take some amazing gains off the table, I’m sensing some euphoric buying in numerous areas of the stock market.
We saw what happened to hydrogen-cell car maker Tesla Motors, Inc. (NASDAQ/TSLA), as the high-momentum stock rocketed to $194.50 on September 30. The euphoric buying was clearly overdone and set for a nasty decline as short-sellers jumped in. Fast-forward nearly two months, and the stock has plummeted 38%, sitting at the $120.00 level as of Friday. And while some are blaming multiple engine fires in several Tesla cars, the reality was the stock simply accelerated much too fast on the chart to levels that were clearly unsustainable. Even now, trading at 80 times (X) its estimated 2014 earnings and with a price-to-earnings growth (PEG) of 11, the valuation is obscene.
Areas that I view as having some excessive run-ups and valuation in the stock market include the Internet services and social media sectors, which include such stocks as Facebook, Inc. (NASDAQ/FB), Twitter, Inc. (NYSE/TWTR), and Netflix, Inc. (NASDAQ/NFLX). These high-momentum stocks are excessively priced by the stock market, so investors should be wary of chasing them higher. As an alternative investment strategy, wait for the stock to come to you; in other words, wait for weakness in the stock market and for prices to decline before jumping into these investment areas.
The cloud services area in the tech sector has also seen some massive advances to the point where there is so much hype built into the price. Small-cap Intercloud Systems, Inc. (NASDAQ/ICLD) emerged on my radar when the stock was trading below $3.00 on November 14. Trading prior to this was light and was in the hundreds or thousands, and then all of a sudden, the stock popped on November 15 to above $10.00 on 12.83 million shares traded. Intercloud Systems subsequently traded above $16.00 the following day on 14.12 million shares. Volume has since declined to below two million on November 21. At this point, the party for Intercloud Systems may be over and what I suspect is the share price will likely continue to fall as speculators jump off.
The cases of Intercloud Systems, Tesla, and the social media stocks suggest there is clearly euphoria in this stock market that needs to be monitored. As well, investors should use these stock market stories as an example of what to beware of in an overly optimistic market that doesn’t seem to follow fundamentals.
Despite what you are reading out there about the S&P 500 jumping to 2,000 by the year’s end and the Dow Jones reaching 20,000 by 2014, this is exactly the kind of hype that surfaces when a stock market shows some bubble-like characteristics.
As an investor in the stock market, you need to be aware of this over-exuberance. When considering a stock in this market, focus on whether the rapid gains are justified given the muted economic growth and weak corporate revenues that continue to plague the U.S. economy.
