Stocks are expensive, and they have been for quite some time now.
After years of one of the greatest bull runs in market history, investors are starting to question the sky-high multiples we’re seeing today.
This is evidenced by the fact that the market has gone virtually nowhere since the start of 2015. One look at the DJI this year, and the reason for trepidation is clear:
Some pundits will tell you not to worry; this bull has plenty more room left to run. Others will tell you to panic; the market is crashing, and the end is near.
Personally, I’m not willing to make such hard predictions one way or another. Forecasting this market is near impossible right now. Anyone who tells you differently is simply picking a side and hoping they’re right.
What I can say for sure, though, is that the market has had it with these ridiculous dot-com-era valuations. It’s time to stop investing so recklessly in “growth” and time to load up on value (if you can find it) instead.
Sentinel Stocks
We all know the story of 20th century miners bringing canaries into coalmines to detect carbon monoxide. When the canary stops chirping, it’s time to pack up and go.
Well, in the deep, dark coal mine of sky-high earnings multiples, the canaries have gone completely silent.
Canary #1: Yelp
Take online review site Yelp (NYSE: YELP) for example. Shares took off in 2013, climbing more than 500% in just over a year.
The hype surrounding Yelp sent the company’s P/E ratio as high as 3,577, prompting hordes of investors to jump ship even quicker than they boarded. From September through May, shares of Yelp have lost as much as 50% of their value:
Canary #2: LinkedIn
Then there’s LinkedIn (NYSE: LNKD), another Internet stock that doesn’t produce anything tangible.
After reporting first-quarter results on April 30, the stock tanked — the reason being revised growth estimates simply could not justify the quadruple-digit earnings ratios seen earlier this year.
Even after the recent plummet, LinkedIn is still valued over $25 billion. Yet when you look at consecutive growth, revenues are down, as are earnings.
Stick around if you’d like, but I’d say the carbon monoxide is so thick you can actually smell it.
Canary #3: Twitter
Here’s another company that doesn’t actually produce anything you can touch and is losing money in the process.
Twitter (NYSE: TWTR) has been a particularly terrifying stock this year and is now coming off its second major crash. As has been the case with countless other hyped-up tech stocks, earnings growth has failed to justify sky-high valuation, and investors are running for the hills:
One look at the chart, and it’s obvious no one knows quite how to value this stock. Quite frankly, I don’t understand why anyone would ever want to trade it.
Canaries #4 and #5: Zynga and King Digital Entertainment
Who would have ever thought an online gaming publisher would tank on the market? It’s not like Konami, Nintendo, and EA haven’t been totally crushing it, right?
After all, Farmville and Candy Crush are vital components of our economy, no? You’d have to be crazy not to get in on this action!
Or this action!
Of course, I’m being terribly facetious here. I must admit, I love me some video games, but gaming stocks are laughable at best.
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Canary #6: Zillow
Alright, this will be our last little birdie for the day: online real estate search engine Zillow Group Inc. (NASDAQ: Z), which was trading at quadruple-digit multiples all through 2013. As you can see in the chart below, shareholders have been absolutely punished this year:
Zillow is yet another Internet stock with stagnating revenue growth. The company has lost money for the last four quarters and is expected to do so through the end of 2015.
In case you haven’t noticed a pattern yet, the market is abandoning overpriced, unprofitable firms that don’t have physical products.
Now, a lot of people might look at the charts above and think “Tech Bubble 2.0,” but I would beg to differ.
Technology, at least as we define it here, extends well beyond the Internet. If you’ve been a subscriber for some time now, you know we rarely talk about dot-com-type companies at all.
As I mentioned above, there’s no telling whether the market will break out, continue to stall, or crash in the coming months. Equities are volatile enough right now that it’s anyone’s guess.
One thing that’s for certain, though, is that moving forward, investors will need to be more selective in their picks. Specifically, it’s time to avoid intangible products and highbrow companies like the six listed above.
In other words, avoid pie-in-the-sky growth, and stock up on real value instead.
Until next time,
Jason Stutman
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