This Is How Upside Momentum Often Ends

In the stock market, the real money is made by riding a trend long enough to make a difference, but having an exit strategy is of crucial importance. Sooner or later, all trends end. To protect gains, you have to exit at some point.

Trend change is a process and never an event. Market participants’ expectations change slowly and it takes some time for institutions to distribute their shares. Here are the typical four stages near the end of a momentum move:

1) Price goes parabolic and extends significantly above its relevant moving average (the average that has proven to be a level of support during the duration of the trend; in this example, this is 20dma for $AE and 50dma for $LQDT). Peeling a bit on strength makes sense in this situation, but keep in mind that you never know how long and how far a stock could go, especially in the late stage of its trend.

2) There is a major, high-volume move in the opposite direction of the trend – quick 5-20% drop that is unusual for the typical price range of the stock. It might last anywhere from a day to two weeks. This is a major tipping point. It changes the prevailing sentiment entirely. All of a sudden, people start to think about the risk involved in holding longer and might take a deeper look into the fundamentals of the company. Fear of giving back profits gradually overwhelms greed for more and fear of missing out.

3) This is not the end of the move. There is a group of market participants that has probably missed the entire move. They have been afraid to jump on the fast moving train and have been watching the stock climbs relentlessly, day after day, week after week, without giving a proper chance for entry. In this case, any major pullback will be considered a buying opportunity by this group of people and they will step up near the 20dma or 50dma. And in many occasions, they will be right. The bounce however will carry very little volume behind it or it will be less than the volume during the pullback.

4) The previous high will not be reached or if it is, it will be on low volume. That snapback bounce is wise to be used to liquidate your positions or at least lighten up substantially. Then there is usually a high-volume move lower.

Keep in mind that these stages are just a rule of thumb, not a bullet-proof rule.

Under Armour Could Be the Next Nike

Today, Under Armour is a $5 billion dollar company that is primarily popular in the United States. Nike has a $50 billion market cap and it is a brand that it is well recognized worldwide. This is reflected in both companies’ geographic revenues:

Currently 95% of $UA net revenue comes from North America. Less than 10% of the world population accounts for the big majority of their sales.

Nike is a much better recognized global brand and as a result 2/3 of its net revenue in international, which also means that currency changes have big impact on its bottom line:

The room for international growth is still huge for both brands, but apparently much more so for Under Armour. Potential is not always realized and the competition in sports apparel and shoes is as big as it gets. It will take years and solid marketing efforts for Under Armour to reach Nike’s popularity. Nothing should be taken for granted.

$UA has a float of under 40 million shares and it has recently announced a 2 for 1 split (the first in its history). 13% of its float has been sold short. Its stock has already quadrupled since the IPO in the end of 2005. It is growing faster than Nike and naturally has higher P/E.

$NKE on the other hand has a 10-times bigger float – 400 million shares. Only 1% of its float has been short. Apparently the market believes that it is fairly valued. $NKE has been publicly traded for almost 32 years, during which it had a 2 for 1 stock splits four times. It has returned 14,700% to its first shareholders. It is a cash machine that pays 1.4% dividend.

Healthcare and Biotech Stocks on Fire

While the general market is in its typical choppy summer mood, Spain is blackmailing Europe to save its banks and the Greeks have just stopped working in expectations for their elections, there are stocks that are trumping the front page-induced negativism and charging higher. I don’t know how long this is going to last but it is certainly something to highlight. Almost anything related to healthcare has been doing exptremelly well lately.

Healthcare software: $CERN $HSTM $ATHN

Biotech: $QCOR $SGEN $ALXN $BIIB $PCYC (last one is quite extended from risk to reward perspective)

 

Healthcare services: $ACHC

Keep attention to these stocks. It even makes sense for them to rally here. Recession or not, Eurozone or not, taking care of yourself is of utmost importance and not a luxury. Nothing is insured against forced liquidations, but at this point market is somehow holding despite the plethora of bad news that have hit the tape lately.  I am talking about some of these on Howard’s show, but my sound was so bad that I decided to post it here too.

How to Value Facebook?

The public market has no idea how to properly value $FB. The same could be said about all growth stocks. Fred Wilson says that based on his rough calculations, Facebook is still expensive at $26:

Clearly Facebook is a premium company and commands a premium valuation and entrepreneurs should not expect to get 10x revenues and 25x EBITDA for their companies in a sale or an IPO. But even at half those numbers there are fantastic returns for investors and entreprenuers to be had.

If speculators are disappointed with the performance of the Facebook IPO it is because they had ridiculous expectations of what rational investors would pay. The market has put a premium valuation on a great company and we should be happy about all of that. I certainly am.

Do we have to value Facebook, the same way we value General Electric?

When you measure the earnings power of a 20 year old, you would make a huge mistake if you only consider her current year’s revenue, expenses and net assets. You could probably use that approach for a 60-year old. But not for a 20-year old. Young, fast growing companies are not valued on the basis of the current situation, but based on the perceptions about future potential. Perceptions vary in the different stages of the market.

In strong markets, many funds have to chase not to fall behind their benchmark. This is a huge underlying support for high-growth stocks. In weak markets, there is nothing to chase and people start to think about risk and valuation. This is one of the main reasons for FB’s performance.  A typical story of overpromise and underdeliver, aside from the other reasons that I mentioned here.

The question is how old is really Facebook and at what stage of its growth cycle it resides?