What Were Those Analysts Smoking?

From 2018 through the early part of 2019, cannabis legalization stories were the talk of the town. Stocks in that industry went wild as limited numbers of publicly traded companies were met with huge demand. Stocks like Tilray , Canopy Growth and Aurora Cannabis spiked up by hundreds of percent, even as the underlying firms lost tons of money. Since then, however, the momentum crowd moved on to other industry groups. From Oct. 1, 2019 cannabis shares went from huge outperformance to major losses. None of the companies detailed in these charts have yet to make any money. Stock prices, which have no relationship to their fundamentals, offer no clues to their true worth. Playing shares strictly because they're going up is a very dangerous game. With no earnings in sight, and from extremely high valuations, when the music stops, there is often no safety net. Many of the cannabis companies may ultimately end up in bankruptcy court. None of the analysts who swayed people into the pot stocks rang the bell at the top, warning traders that the game was over. How does this relate to what you should be doing now? The new momentum darlings are a more diverse group. I'd include Carvana , Zillow , Peloton , Beyond Meat , and even Tesla in this category. They've experienced huge run ups which are unconnected to any fundamentals justifying those moves. Carvana is a concept stock. They buy and sell vehicles entirely on line, something that resonates with younger people. It came public on Apr. 28, 2017 priced at $15, then quickly sank to $8.10. Those early days did not look too promising. As of Oct. 4, 2020, though, CVNA fetched a cool $222.70, down slightly from an earlier all-time high near $240. That was quite a ride considering losses per share have actually grown as sales expanded. Carvana's March panic low was $22.16, illustrating how quickly enthusiasm for money-losing firms can erode when traders get scared. Nobody believes Carvana will turn profitable anytime soon. Most analysts see big deficits for 2020, 2021 and even out a full half-decade into the future. Value Line's three to five year projected price target range for CVNA runs from $90- $165. Why play around with this stock when fundamentals can't justify even that high-end 2025 goal price? That same basis logic applies to the online real estate listing firm Zillow . They have a great presence and a wide customer base. Zillow hasn't mastered the art of making money though. All those clicks have yet to produce a positive earnings year. Momentum-based traders don't seem to care. From a March nadir of $20.04 Zillow climbed to close at $108.18 on Oct. 2. Analysts think Zillow can trim its loss during 2021 and go on to earn about $0.50 a share by 2025. If they're correct, which is no sure thing, Z now sells for greater than 216-times that five year out estimate. Value Line's long-term projected price range for Zillow runs from $30 - $50. Why pay $108 now? Peloton turned slightly profitable this year after benefiting mightily from the closure of commercial gyms and Covid-related stay-at-home orders. That's good news. But is it enough to justify paying 262-times its 2021 estimate of $0.41? Not in my world. Value Line's three-to-five year goal price range for the company remains $70 - $100 vs. a quote of $107.51 as of Friday. Is Peloton really worth over 140-times its 2025 estimate? Beyond Meat has caught the fancy of vegans and traders willing to bet on society's trend toward healthier eating. At a recent quote of $166.24, though, it appears well beyond any rational pricing. Value Line thinks BYND can earn $1.40 a share by 2025. Today's price is about 119-times that EPS objective, which might, or might not come to fruition. Growth prospects appear decent, but from 268-times next year's estimate there is a lot of downside along with little upside. Value Line thinks BYND will trade from $120 to $200 up to five years from now. Retreating to the low-end of that range would represent a 27.8% haircut from the current quote while likely collecting no dividends along the way. Perhaps the worst factor that comes with holding story stocks is the inability to know when to sell. When share prices are disconnected from fundamentals, there is literally no way to make rational price targets. If you're lucky enough to sell for gains when would you buy back in? If you're printing money by holding on, how can you know another large sell-off in not in the wings? Stocks like these are best left alone. They are more like lottery tickets than investments.

What Were Those Analysts Smoking?

Just as we saw with pot stocks, if you play shares strictly because they're going up, you're likely to get burnt.

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