“Marquee” growth stocks will always trade at much higher multiples than the market. The reason is simple: they’ve captured the imaginations of investors and are at the center of a cultural, media, and economic revolution.
But by virtue of their epic valuations, they are highly vulnerable to sell-offs and changes in market psychology and investor whimsy. They are also vulnerable to the least sign of trouble or investor disappointment. When stocks are trading for a perfect ending, any blemish on that outcome can lead to dramatic sell-offs.
Easy Money Makes the Task Even More Daunting (and Important)
Most importantly these stocks, as well as the broader market, are beneficiaries of the flood of liquidity coming from central banks and supporting the prices of all financial assets. With more than $4.5 trillion of excess liquidity sitting in global banks (and much more coming), the world is awash in more money than ever before.
Financial asset prices are being inflated far beyond their fundamental values, including Manhattan apartment prices, Miami condos, or pieces of fine art. Social media stocks are no different.
When Federal Reserve Chair Janet Yellen warned a couple of months ago that, among others, social media stocks had entered a bubble, that was like the judge at the Indianapolis 500 handing out speeding tickets. And investors reacted accordingly, bidding up those stocks further. Until central banks stop injecting monetary heroin into the veins of the financial system, the most speculative stocks will keep trading at valuations last seen during the Internet Bubble.
And we all know how that ended.
In an era of trading cycles accelerated by information exchanged at the speed of light, it remains more important than ever to separate the wheat from the chaff when it comes to true stock values. By applying relatively simple metrics, reading daily financial news rather than Twitter feeds, it can still be found in an inflated market.
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.