Momentum names may see more pain

Fri Apr 4, 2014 9:08pm EDT
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By Angela Moon

NEW YORK (Reuters) - After their worst week in several years, high-flying stocks that defied gravity throughout 2013 look like they're in for more punishment. The reason: Despite the plunge, they still look overvalued.

Familiar names such as Netflix, Facebook and Tesla Motors, along with a number of biotechnology and cloud-computing stocks, have been pummeled in the last month. Some stocks are down more than 20 percent over that period, falling into their own bear market, and yet their valuations still far exceed those of the broader U.S. stock indexes. Wall Street defines a bear market as a drop of 20 percent or more from a recent peak.

Facebook Inc (FB.O: Quote), for example, has fallen nearly 22 percent from an intraday record reached less than a month ago. The stock was still up nearly 3.8 percent for the year at Friday's close. Among biotech names, Alexion Pharmaceuticals (ALXN.O: Quote) has declined 23 percent from a February 25 intraday high, and yet the stock on Friday was still up 7 percent for the year.

Facebook still traded on Friday at a price-to-sales ratio of nearly 20, making it the most expensive in the S&P 500, which has an overall price-to-sales ratio of 1.7. The other companies with expensive valuations read like a Who's Who of so-called momentum stocks, including Regeneron (REGN.O: Quote), Alexion, TripAdvisor and Vertex Pharmaceuticals (VRTX.O: Quote).

"There's value somewhere, but since these things aren't being traded off typical valuations, you can't go by those metrics, and it's more about when do you find that stability," said Mike O'Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.

The price-to-sales ratio is the way to value a stock by looking at its market capitalization in comparison to its sales over a 12-month period.

The declines have come at a time when investors overall are seeing a general improvement in economic figures, including Friday's nonfarm payrolls data, which showed strong job gains in March and more people moving into the labor force.

On Friday, the Nasdaq lost more than 100 points even though the S&P 500 briefly touched another intraday record.   Continued...

A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York April 4, 2014. REUTERS/Lucas Jackson