Investment Geniuses

Bubble Stocks: What Goes Up Might Come Way Down

Several months ago, Rob Arnott, Shane Sheppard and I wrote an article entitled, Yes, It’s a bubble.  So what?  In that piece, we argued that many stocks were approaching bubble levels, but warned that the market could go even higher.  Well, now its higher so at Cornell Capital we went back to the drawing board to find what we thought are the ten of the best bubble candidates.  We did so because we believe these are the type of companies whose stock could drop 50% or more if the economy slows, sentiment changes, and the market declines.  To avoid the list being polluted by tiny companies, we only considered candidates with a market capitalization of at least $5 billion.  We also avoided health care companies because we are not health care experts and many of the health related companies have experienced big stock run-ups associated with specific potential treatments that we cannot evaluate.  What follows is our list of ten in no particular order along with a brief explanation of why each company is on the list.  The list is not meant to comprehensive.

[REITs]

Q3 hedge fund letters, conference, scoops etc

Bubble Stocks

  1. Roku. Up 260% in the last calendar year despite negative operating income in 2017.  In a hotly competitive market.
  2. Shopify. Up 290% in the last two years.  Negative operating income the last four years.  Faces intense competition in business software.
  3. Spotify. Up sharply from the IPO.  The company has never made an operating profit.  Market capitalization of $31.7 billion in a highly competitive market
  4. Tesla. A decade of operating losses, but still worth more than GM despite its tiny comparative production and constant management upheaval.
  5. Square. Up 760% in the last two years. The company has never made an operating profit.  Market capitalization of $39.8 billion in a highly competitive market
  6. Hubspot. Another hot advertising company.  Up 220% in the last two years.  The company is yet to approach an operating profit.
  7. Palo Alto Networks. Sexy networking company that has run up 175% in the last six months despite the fact that it has never made an operating profit.
  8. AMD. New chips and recent success in competition with Intel is impressive.  But the stock is up 1,225% in the last two and one-half years, and although operating profit turned positive in 2017 it remains meager.  Meanwhile, the sleeping giant, Intel, is awakening.
  9. Amazon. A great company to be sure, but it is up 150% in the last two years to almost $1 trillion in market capitalization.  The current P/E is 155.  Even a great company can be substantially overpriced.
  10. Netflix. Another great company, but it has run up 280% in the last two years to surpass Disney in market capitalization.  Profit is positive but small, so the P/E ratio is 171.  Meanwhile Disney and others have woken up to the threat.

As an indication of what can happen consider Snap, which soon after its IPO was trading at $27 and looked a lot like the ten companies on our list.  Now it is trading at $7.750, down 70%.  It is a time for caution.

Article by Brad Cornell’s Economics Blog


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