Momentum stocks have taken a beating for the last few weeks. Leaders like Facebook Inc (NASDAQ:FB), Tesla Motors Inc (NASDAQ:TSLA) and Netflix Inc (NASDAQ:NFLX) declined by more than 20% from their peaks. Many of these stocks are rebounding, though, and it’s anyone’s guess as to whether it's a signal that the stocks are ready to head back to new highs or if it's just a head fake.
Hard To Kill
The stocks are still extraordinarily expensive relative to potential growth, but it’s hard to kill momentum and expensive can always get more expensive.
Below is a reminder that momentum stocks die hard. The chart looks at Yahoo! Inc.'s (NASDAQ:YHOO) stock during the dot-com bubble from its IPO in 1996 through its peak on Jan. 3, 2000. During that time, Yahoo!’s stock increased 90 fold, but it also declined by 20% or more on eight separate occasions. The two most noteworthy drawdowns were the first and last ones.
Reminiscent of Facebook, Yahoo!'s first drawdown happened just after the stock IPO’d. Between May and July 1996, YHOO fell by 50% from its first closing high and it didn’t make a new high until January of 1997.
Long And Severe
Yahoo!’s final drawdown before its bubble burst didn’t come until April 1999. That decline was both severe and relatively long lasting. Yahoo!’s stock spent nearly two thirds of the year below its former peak price and at its lowest point it had lost nearly half its value. In true bubble form though, the stock exited that period by more than doubling in the final month of the year.
Yahoo!’s stock was never cheap during the entire period. Its price-to-sales ratio ranged from 16x to 217x. That didn’t stop the momentum from carrying it higher. It also didn’t stop value from eventually winning out though. Yahoo! went on to lose 97% of its market value over the next seven quarters. In the end, though, value always wins. Either earnings have to grow to justify the price, or prices will fall to meet earnings. But in the near term, price can do whatever it wants.
