Sunday, November 24, 2013

Markets are Overheated: Find out Which Ones

All you see on CNBC these days are people arguing about whether or not the stock market is overheated and heading for a massive correction. I am here to tell you why it’s not.

               Now off course some sectors and some companies have become massively overvalued and are bubbles that will pop. But in general most companies are still trading at a fair value, and others are trading below what they're fair market should be, for example, Apple (after having a terrible year on the market) has become a cheap stock, also Microsoft continues to trade at just 14 times earnings (below the average of 15).
               While I’m on the topic of undervalued companies, take a look at
the auto industry, Ford and General Motors trade at well below 15 times earnings and have seen profits and revenues increase dramatically throughout the year. But no one seems to care about these huge corporate automotive giants, the hottest stock in the auto industry this year was Tesla Motors.
               Now Tesla has been in the spotlight recently as 3 all electric Tesla Model S sedans have burst into flames prompting the federal Government to investigate the safety of the car and possible ordering a recall. But  if you are invested in Tesla that is the least of your
worries considering the car has passed all safety test with flying colors, what investors do have to worry about is Tesla’s evaluation and its miniscule profits.
Tesla stock has been soaring all year rising over 500% at its height of 194.50 a share. The catalyst for this rapid growth was Tesla’s first profitable Quarter, which was a big feat for the electric car maker but did warrant the company's market price soaring to $14.8 billion (as of Friday). Tesla is a classic bubble and I am glad to say has finally begun to pop, the stock is down almost 30% in the last month.
My suggestion if you are currently a stockholder in Tesla is to take your money and run, and if you are considering an investment into Tesla I would hold off until the stock falls to around $70-80 a share which might be sooner than you think.
Tesla Motors is not the only bubble out on the market a few more are Amazon, Facebook, Netflix, Yahoo,
and Twitter. Any of these companies sound familiar? They should besides the fact that all these companies are well established brand names all them have also seen their stock soar through the roof over the last year.  
When people worry about a potential market correction they should not worry about stable blue chip components like General Electric and Qualcomm but rather worry about momentum stocks like Netflix.
Let talk about several of these companies, lets take Yahoo for example. Yahoo has seen its stock rise 96.5% this year as investors respond to new Yahoo CEO Marissa Mayer's attempts to turn around the struggling internet giant. Truth be told, she is doing a good job, a new logo new investments, a new image, Yahoo seems to be getting a new makeover, but lets take a look under the surface.
What you find does not justify the rapidly rising
stock price, earnings have been flat, and the company's main revenue stream (internet ads on its search browser) continue to erode. What Yahoo does have going for it is its investments in a number of new Tech startups (such as Chinese e-commerce giant Alibaba, which is planning to go public) that may produce additional revenue for the company later on, but for the time being Yahoo is far from being “turned around” and my recommendation for the company is to avoid buying. Mayer might be able to turn the company around in the long term but not before the company experiences a massive correction.
To emphasize point only a few sectors and
stocks are overvalued enough to be called bubbles and are endanger of experiencing a correction. The most bubbly sector in my opinion is the technology sector and specifically internet based companies such as Facebook, Yahoo, and Amazon, as well as Twitter and Netflix.
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I will be posting an article every weekend and looking back at the political and economic events of that week, both personally impacting events and suggestions about my opinions on the future of the market