We called them the "red hots" back in the days of yore. They were a group of stocks that went up almost every morning back in 1999 and the first two months of 2000 and they were must buys.
There were so many of them, mostly newly minted companies, that we had to have a draft back at my old hedge fund, where we would put a list of red hot stocks in a hat and portfolio managers would have to pick names out of the hat and give me a sales pitch for each one in a couple of days' time. Typically, I would have liked to have more time to study the names but there was too much performance to be gained so we had to work on the fly. Once I heard the best sales pitches I bought them, especially companies involved with telecom and the web, with what would, to the outsider, look like reckless abandon.
Me? I just knew we were in silly time, where froth meant nothing to the buyers and being overexuberant made you the most money.
I told myself over and over again that this period would come to an end and the money would be made and that was all she wrote, the red hots would cool and in some cases plummet into oblivion.
Now there's a new generation of red hots and you can spot them. They are the ones on your screen that are going up exhaustively, often not even waiting for the opening bell. They seem to know no gravitational pull.
What names am I thinking of? Several of the most recent IPOs: Beyond Meat (BYND) , the ersatz beef company; Revolve Group (RVLV) , the e-commerce fashion company; CrowdStrike (CRWD) , the cloud cyber security business; Zoom Video (ZM) , real time cloud conference; and now Slack Technologies (WORK) , which came public just today.
Let's add to that a couple of others: Zscaler (ZS) and Okta (OKTA) , both cloud security business; Twilio (TWLO) (the power behind outfits like Lyft (LYFT) ), which just, oddly, added Jeff Immelt of General Electric (GE) infamy, to its board; and Shopify (SHOP) , ,the small-to medium-sized business engine.
Throw in HubSpot (HUBS) , Atlassian (TEAM) , Coupa Software (COUP) and you have the panoply of parabolic names.
What's a parabola have to do with anything? Stocks that rip higher in parabolic fashion are incredible until they are terrible. You don't know when the rollover will occur, or how high these stocks will go before they end up hurting people.
Why do I care so passionately about warning you on these stocks? Simple: because think of why they are going up. They are going up because of circular reasoning, they are going up because analysts keep raising price targets but on no new information. That's what is known as multiple expansion. A solid market goes up on good earnings and raises forecasts.
The toughest thing is that we are at the moment when the most money can be made. You could look like a total dope if you don't switch directions and do some selling.
But otherwise the second coming of the red hots is here and the playbook says greed's good, but only for so long.
