3D Stocks Get Bullied

 | Feb 05, 2014 | 11:38 AM EST
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Some markets are just plain mean. This is a mean market for certain, a market that frankly hates the good with the bad and takes the bad down to levels that are breathtaking.

A case in point is the 3D stocks. We have known that this exciting technology has produced stocks that got way beyond where they should have gone. But that's what happens when you have growth stocks with actual numbers that have to be met.

Now, if you read the release from 3D Systems (DDD), the company's thrilled with itself as usual, saying that all systems are go. But when it talks about its expectations, the kind of earnings-per-share numbers that have dazzled, known as non-GAAP earnings, it has taken down expectations from between 93 cents to $1.03 to 83-87 cents. Now, on a cut like that you would not normally expect a stock to lose a quarter of its value, but remember 3D printing is a cult. The companies in it, namely Stratasys (SSYS) and Voxeljet (VJET), plus this one, have consistently delivered much better numbers than people were looking for.

Given that people were looking for 93 cents to $1.03 and given the magnitude of the beat, this company has delivered it is reasonable to believe that some were really looking for something like $1.10 a share. So, now consider that the company may do 83 cents vs. $1.10 and you can see why someone might think that they don't care what it sells at, they have to go. And if you really want to get into the weeds of momentum stocks, remember that this one traded at $33 a little less than a year ago, so what's wrong with selling some at $68 down to $58? For these people, nothing. Once a stock is broken, meaning that the momentum is gone, it takes forever to build it back up, if it is even possible at all.

Now, we know that 3D printing has a bright future. This kind of modeling works. Plus, the company blamed increased research and development spending for part of the shortfall, although a step up in marketing expenses hurt, too. But don't forget, if a product is hot enough it doesn't even need to market. The CEO even mentions, "we are willing to tolerate earnings reduction and even slight gross profit margin compression to substantially accelerate our growth rate and market share." But again, there was thought to be so much  business that market share shouldn't have been an issue. Now we are thinking it could be more zero-sum than we thought.

More importantly, though, is that the shareholder base can't tolerate these disappointments, even if the company can. That's because momentum investors aren't in it for anything other than rising estimates. A $60 stock is not cheap if a company is going to earn 90 cents, which would be a reasonable earnings target given that you have to expect that the company slashed its growth rate to where it can beat it.

The meanness of the market triggers revulsion to the whole sector. It triggers selling in all momentum stocks. It helps bring the entire market down and the selloff occurs despite the oversold condition of the market because, in the end, there's no value in sight for these momentum stocks, not unlike much of the rest of the high-multiple stocks we are seeing underperform today.

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