Beware of Bubbles & Market Valuations in QE Sloshfest
There have been several reports of money managers returning funds to investors because of a lack of attractively valued investment opportunities in the markets. This is actually very responsible and quite prudent from a fiduciary standpoint where most fund managers are so concerned about raising assets under management that they sacrifice the fund`s long term viability by investing at inopportune times, i.e., investing in assets at historically rich prices relative to the underlying fundamentals of the business.
QE has definitely distorted many asset prices to the upside, and with it finally ending this summer, fund managers are weary of buying at these levels without a guaranteed catalyst to replace the Fed`s monthly liquidity injections, and the global economy will really need to be humming along to replace $85 Billion of Fed injections via asset purchases.
We will start with Twitter Inc (NYSE:TWTR) which opened its IPO around $45 a share, traded between $40 and $45 a share for several weeks and then took off with the Santa Claus December Annual Rally to $73 a share. It is currently trading around $69 a share.
All the valuation metrics are going to look bad with this stock from EPS to Operating Margin and EBITDA, as the story for Twitter will be one of a growth stock so none of these valuations matter in the short term. This is the bullish case for the stock, and it makes for a great investment theme if you can sell the story that normal valuation metrics don`t matter, it creates the environment that many a momentum stock feeds off of from a frenzy standpoint.
However, the first and second earning`s reports for Twitter in 2014 are going to bring home the reality to investors that there is a difference between a great product used by the media and various celebrities for marketing purposes, and a revenue generating model that justifies a $38 Billion Market Cap.
The next bearish catalyst is the ending of the Lock-up Period, and as these probation periods from selling shares on the market expire, expect a lot more shares being added to the trading float trying to capitalize on the current lofty stock price in an overall bull market to secure their Payday for these initial investors in the company a la Facebook Inc (NASDAQ:FB).
Once key technical support levels break and automated selling programs kick in this just adds more downside fuel to the fire as investors get nervous and reevaluate their “Greed Factor” and some large initial investors who were originally thinking in terms of holding out for becoming Billionaires, start to reevaluate and settle for becoming Multi-Millionaires, thus dumping additional shares onto an already saturated market.
Just like in Facebook Inc (NASDAQ:FB) once the earning`s reality and the share unlocking takes place the Twitter stock will enter a defined downtrend, let the stock find a bottom before venturing to enter from the long side for what may provide a value proposition at some price.
But time will tell exactly what price constitutes value in this name, so investors will have to continually monitor earning`s results, the overall space that Twitter operates in, along with both the overall market and global economy.
But one thing is sure Twitter with a current Market Cap of $38 Billion, with it not actually being a profitable company by many financial metrics, is quite an expensive stock and due for a price realignment with a healthy dose of market reality reinforced by actual earning`s results in 2014.
Amazon.com, Inc. (NASDAQ:AMZN) is the next candidate ripe for a pullback in 2014, it has had a nice run the last five years and the actual trading float is really small as much of the available float is in the hands of long term investors in the company.
However, with QE Infinity finally looking to come to an end which has definitely benefited this stock as much as any over the last five years, these long term investors may finally start locking in these gains and secure this wealth by diversifying into more capital preservation type investments.
Especially since Amazon.com, Inc. (NASDAQ:AMZN) has gotten a relative pass on earnings over the last five years due to growing the company and gaining market share, at some point the company has to start producing larger profits than 0.28 earnings per share to justify a 1400 P/E ratio.
Our thesis on the stock is that Amazon finally starts to get punished for poor earnings in 2014 and in combination with the lofty stock appreciation over the last five years buttressed by a multitude of QE initiatives that capital gains finally get locked in at these levels in the stock.
Similarly to how the major Apple Inc. (NASDAQ:AAPL) run to $700 a share ended very abruptly with a six month and $300 haircut in the stock, once the downturn in investor sentiment occurs, and the downtrend gains speed, losses become self-fulfilling for investors, leading to additional selling, and given how far this stock has come in recent years there is no real support until the $240 a share level.
Consequently if the downtrend takes hold in 2014 the pullback could be quite severe for investors trying to hold through the weakness in the stock. Sort of like David Einhorn and Greenlight Capital`s approach to their Apple position, they would have been much better off by selling at $700 a share, and buying back in after the collapse at around $400 a share.
Amazon.com, Inc. (NASDAQ:AMZN) is a good company with a bright future, but from a valuation standpoint it is due for a major pullback in 2014. Any investors already in the name need to take profits ASAP, and new investors should avoid trying to pick a bottom too soon, Amazon has a lot of hot air in its stock price, and once the key technical levels of support fail, look out below!
Tesla Motors Inc (NASDAQ:TSLA) is our third stock candidate setting up investors for a sour 2014 campaign. The stock is the ebullient highs of around $195 a share, trading currently around the $150 a share level and we expect the stock to fall below the $100 a share level some time in 2014; whether that area represents a good buying opportunity for investors is an entirely different matter.
But some of the headwinds for 2014 are going to be stiff earning`s comps for 2013 where environmental credits made earnings look a whole lot better than they actually were given the lofty stock price. With the dismal automobile numbers for December being recently released it appears that many people who needed to upgrade their vehicles have already done so in 2013, and this was one of our concerns with GM as a possible headwind. Furthermore, given Ford`s downbeat profit forecast in 2014, December`s automobile numbers, and the rise in interest rates 2014 seems