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Whiplash Week for Momentum Investors

Jan 31 2014, 9:25pm CST | by

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Whiplash Week for Momentum Investors
 
 

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Whiplash Week for Momentum Investors

Welcome to the thick of  2014 earnings announcements.  This year has not been very upbeat so far. Even those companies that did okay in Q4 aren’t painting a universally happy picture with their forward looks into the year ahead. Investors haven’t liked that much.  This was a week of high profile names crashing and burning each and every day.

Momentum investing is not my cup of tea.  But it might be your bottle of Pepcid if you keep one handy at your desk because often you will need it. My description of this investment style is simple. You, the MO SHMOE  are the Dalmatian chasing the spot on the tail of the dog in front of you. Everyone piles in because a stock is moving. So, you do, too.  Investors Business Daily publishes lists of the stocks that everyone is chasing. They are great, until they aren’t.  You make money until you lose 8-10% in a day when all the dog chasers decide they will bail out on that same day.

Consider Groupon which I thought was a Put On from the get go. Two years later the stock is still half the offering price of its IPO. Think of Lululemon climbing ever higher until they made pants with material that is too thin in important areas.  Then the company had to ship back cartons of goods they could not sell in a quarter. Think of Krispy Kreme selling disgustingly sweet donuts rising ever higher; or Crocs when even George W. Bush was seen wearing a pair of these plastic shoes. Once the fad ends, the stock returns to earth. Stocks always fall about twice as fast as they go up. The ride up is great but the ride down can be nasty, especially if you are getting margin calls because you combine one aggressive style, momentum investing, with another called leverage. I do neither which is what explains the long length of my career.

Apple has been falling for well over a year now. The APPL Fan boys really got on my case at the end of 2012 when I wrote Apple is so 2010 in this blog. We owned Nokia NOK, then 3 now closer to 7.   Apple at the time was around $700 on its way down despite analysts suggesting it was going over 1000. Just think back about Motorola which invented cellular telephony with Nokia. MOT faltered first. Nokia stumbled next. Blackberry collapsed this past year.  Nobody seems to stay too long at the top of the smart phone heap.

Apple  created new product categories that didn’t exist before such as smart phones and tablets that were very disruptive. It invented the iTunes store doing quite a number on the recorded music industry.  All were exciting and ground breaking innovations that gave them first mover advantage. But now Steve Jobs is gone. There are no new categories and Apple is  still intent on charging top of the line prices, limiting its share of market. It is also creating a terrific umbrella for competitors to offer their products at lower prices that appeal to buyers. On Monday January 27th, Apple closed at 550. Its results were disappointing.  The next day it dropped 8% to close at $506. As the week has progressed, it has broken through $500 and is trading at $493. So far, this has not been a winner for Carl Icahn.  Motorola, by the way, wasn’t a winner for him either.

Yahoo was the midweek disaster du jour.  Marissa Meyer has been driving the Yahoo bus for about 15 months now. The stock has soared but not, it appears, because of what she has been able to accomplish so far.  Meyer’s predecessor Carol Bartz fought long and loudly and hard when Alibaba’s founder Jack Ma tried to force Yahoo out of its very valuable 25% position in Alibaba. As Alibaba prepares to go public this year, it has provided a secure underpinning to YHOO’s stock and allowed Meyer a safety net as she tries to rebuild the company. Her delicate looks apparently aren’t in sync with her firm hand on the tiller.  In recent days she fired the man she hired to head up display advertising. That can’t have been easy and should have been the first clue that the quarter was going to show problems. So far, display advertising, Yahoo’s bread and butter, have continued to decline quarter by quarter in both number of ads and pricing.  This is not a good situation. On 1/28, Yahoo closed at $38.22. It was already off from its January 8th high of $41.72.  Once earnings were announced, YHOO plummeted to a low of $34.89.

As for Amazon(AMZN), I don’t have the stomach for owning stocks at 100 times earnings. Over the decades I have sat and watched many rise ever higher until the P/E (price to earnings ratio) gets over 100. Eventually, the company has to produce earnings to justify that price or as the expression goes earnings have to “grow into it.”  But more often than not, corporate managers get a pass for a while until the stock comes crashing down to earth. Amazon is themost seasoned company that falls into this category.  Sales were softer than expected and margins were none existent.  Jeff Bezos often has convinced Wall Street that he is investing for the future.  For sure he is doing a number on lots of bricks and mortar retailers some of which are also struggling to make money in a tough economy.  But eventually, you can’t get away with a multiple like that if you never generate a worthwhile return for shareholders.  Amazon was trading at $403.51 at the close on Thursday, January 30. A day later, it had dropped 10% to $362.

Only Facebook (FB) bucked this trend . Better than expected results killed the shortsellers who didn’t believe that Facebook could grow into its multiple but it has learned to master mobile users and attract advertisers so it did better than expected.

Momentum Investing is a strategy that I find unappealing. My advice is Don’t Be a “Mo Shmoe!” Stocks that are overpriced and especially ones that are over owned are subject on any day of any week to dramatic price moves. In a way, that situation has only gotten worse in recent years as the biggest equity asset managers are now controlling trillions of dollars.  It shows you why Raj Rajaratnam, now in jail,  and SAC Capital, which recently paid a $1.8 billion fine to the SEC,  were so intent on paying people to give them inside information in advance to avoid the kinds of losses that faithful shareholders were subjected to this week in some very popular companies.

Joan E. Lappin CFA   Gramercy Capital Mgt.

 Mrs. Lappin, Gramercy Capital, and its clients own shares only in Nokia of those companies mentioned in this article.  To follow Joan on Forbes.com click on the button at the top of this article. To follow her on Twitter: @joanlappin.  For help with your investment portfolio or information about our firm: info@gramercycapital.com

Source: Forbes

 

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