The macroeconomic environment is flexing its ugly muscles again and volatility is spiking here into June.
Underneath, I see a tale of two markets where complacency exists in expanded valuation multiples among our leaders.
There's a near-arbitrary feeling to the price of some of the favorites and the momentum types are hiding in them for fear of (1) nowhere else to go and (2) a seemingly obvious attempt to stay with the herd and not do any original work.
It's easy to hide in the winners. There are good reasons why certain stocks are where they are.
Take Facebook (FB), Ulta Salon (ULTA) or Amazon (AMZN) or Roper Industries (ROP), Texas Roadhouse (TXRH) and Dave & Busters (PLAY) as examples of these winners. These companies are just extraordinary franchises that are executing well in the current environment. These stocks also trade at outrageous multiples, deservedly so, but arbitrary as well. In choppy markets like these, the growth folks are holding onto these types and dumping anything else that may have a wart or two on it. It's a fine game until expectations get detached from reality and the growth multiples compress on expectations that are more reflective of intermediate-term fundamentals.
This is where we are, in my mind. The leaders remain on their perches until all of the garbage is sold down. The leaders, then, get sold down afterwards. So, if you have a sense of fundamental deterioration or misguided and extrapolated expectations that may not be reality, you have the beginnings of an alpha short thesis.
Look at the 3D printers, as a group, Shake Shack (SHAK) and Splunk (SPLK) as somewhat recent examples. I would add LinkedIn (LNKD), prior to yesterday's takeout, to the list of growth stocks that fell down hard after extrapolated expectations and arbitrary valuations were awarded during relatively brief periods of meaningful outperformance.