Friday, April 4, 2014

No Earnings, Big Problems

by Bespoke

Both the Dow and the S&P 500 held up well today, falling slightly but not suffering any kind of major setback.  But not all was well in the market by any stretch, as we saw a lot of the "high-fliers" take nosedives once again. 

Companies can have the best long-term growth prospects in the world right now, but if they don't already have earnings, they're getting taken to the woodshed.  A month ago, investors were paying sky-high premiums for companies that make no money now but have huge growth prospects, but those premiums are falling fast. 

In the Russell 1,000, there are 85 stocks in the index with negative trailing 12-month P/E ratios (negative earnings).  Those 85 stocks were down an average of 1.78% today, and they're down an average of 3.9% over the last month.  The other 932 stocks in the Russell 1,000 were down just 20 bps today on average, and they're up an average of 2% over the last month.

Below is a look at the biggest losers in the Russell 1,000 today.  There were 36 stocks in the index that fell more than 3.5%, which is a high number for a flat day in the market.  As you can see, the large majority of the biggest losers today were stocks with negative or sky-high P/E ratios.  And most of them were stocks that have also taken huge hits over the last month as well.  Stocks like FireEye (FEYE), ServiceNow (NOW), Workday (WDAY), Palo Alto Networks (PANW), Tableau Software (DATA), Splunk (SPLK), Under Armour (UA), Facebook (FB), SolarCity (SCTY) and Pandora (P) are all names that have sky-high valuations and sky-high expectations, but they all got slaughtered today.  These kind of stocks were market darlings in 2013 and early 2014, but the tide has shifted quickly since the beginning of March.  Investors clearly want to own companies with strong fundamentals right now, and they're exiting the "high-fliers" that they were willing to own just a few weeks ago at a remarkable rate. 

What has really been amazing is that all of these huge declines have come during the earnings off season, and most of the companies that have taken hits did very well following their last earnings reports.  The first quarter earnings season is coming soon (next week), so all these companies that have taken big hits lately will have a chance to prove investors wrong.  Some will do so, and some won't.

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