As U.S. momentum stocks take beating, some sectors benefit

Fri Mar 28, 2014 10:04am EDT
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By Ryan Vlastelica and David Gaffen

NEW YORK (Reuters) - Investors in some of the past year's hottest U.S. stocks have been given a savage lesson in the risks of so-called "momentum trading".

A group of 24 such companies compiled by Credit Suisse has lost $63 billion in market value, or almost 19 percent, so far in March. One of them, streaming video service Netflix (NFLX.O: Quote), has declined on 15 of the last 17 trading days, while another, online travel service Priceline (PCLN.O: Quote), is on pace to for its worst month in nearly two years, while Twitter (TWTR.N: Quote) on Wednesday sank below its November first-day closing price for the first time since December, when the company had publicly traded for less than a month.

The sell off may well have further to go, investors warn.

For one thing, the initial public offering market looks vulnerable after King Digital Entertainment KING.N, maker of the popular Candy Crush online game, cratered on its debut, losing 15 percent in its first day of trade on Wednesday, and another 2.7 percent on Thursday. If such raisings get pulled or pared back it will likely hurt the banks' underwriting fees.

But while it all stands as a warning to those who joined crowded trades in richly priced stocks, it is good news for short sellers who are prepared to bet against what they see as over-valued stocks, and for investors who spend their time searching for unrecognized gems trading at bargain-basement levels.

It also indicates that the investing world may be returning to more normal rules, that includes sharper assessments of the risk in different sectors, now that the Federal Reserve's bond-buying stimulus program is being reduced and there is less "easy money" sloshing around.

"The weakness in momentum stocks does have an implication for the broader market," said Joshua Brown, vice president of investments at Fusion Analytics in New York. "The best way to gauge general risk appetite is to look at momentum sectors."


Traders work on the floor of the New York Stock Exchange March 21, 2014. REUTERS/Lucas Jackson