Why is Palo Alto Networks (PANW) going down? What's with Action Alerts PLUS name Facebook (FB) if everything's so good? How comes Regeneron (REGN) or Celgene (CELG) can't sustain their moves?
I hear these questions all of the time lately on Mad Money -- or walking down the street for that matter-- and the answer I want to give sounds so soporific that I dare not just blurt it out in a lightning round. Investors just don't feel like "paying up" for stocks right now.
We have periodic bouts when stocks are valued too highly vs. the numbers, and it usually has to do not with the companies themselves, but with flow of funds and tag-alongs.
For example, Palo Alto's stock could be going up right now, in another environment. There is nothing new. They had a very positive presentation last week which, by all counts, was a total home run. But its stock is expensive. Sure, it makes money. Nevertheless, there are times when investors at big funds do not want to pay 84x earnings for a stock, which is what Palo Alto sells for. It's just considered too rich vs. other opportunities out there, and the catalyst, the analyst meeting last week, is now behind it.
You see, the market values stocks in inconsistent and fickle ways. Right now for example, salesforce.com (CRM) sells at 74 times earnings. Why did it get that high? Because it reported a monster quarter, much better than expected. Soon, however, without more news, the halo of that quarter will wear off, and the stock might fall to other levels as people grow concerned that the next quarter may not be as strong as the last one.
That's what is happening right now with Facebook, a budding consensus that things just aren't as good as they were. Investors have big gains in Facebook, and the stock is very highly valued vs. future earnings.
But, you might say, it deserves to be valued highly, because it has a much higher growth rate than the average stock.
The problem is, periodically the market will switch from being relatively oriented to being absolutely oriented. Right now, we are in an absolutely oriented mode, in that we think that any high price-to-earnings multiple is too high. We aren't thinking about the bigger picture of how this or that company is growing much faster than others. We are simply saying "they are paying too much for that stock."
What makes it all change? We get some very slow macro figures, then we search for higher growth, a company like Palo. We get a fabulous quarter from another high-growth company, then Palo comes instantly back in favor. Or Palo Alto announces an amazing quarter, sharply better than expected, which makes the stock look cheap vs. itself.
One of those three has to happen. Until then, holders are in absolute hell. And that's why I say "it's too expensive" for the moment, not that it is too expensive, period.