Philadelphia, Pennsylvania – (StockNewsDesk) – 09/08/2014 — In some ways, the valuation and hype surrounding the tech companies have surpassed the excesses of the 2000 bubble. In some other ways, it hasn’t, after all, back then, companies with no revenues and heavy losses were commanding market estimates in the billions. Even an announcement by a brick and mortar retailer who was building a website could lead to stocks opening higher by more than double or triple.
One logical explanation for today’s estimates for these companies revolves around the Federal Reserve’s quantitative easing and zero interest rate policy which over the last five years has pumped in an excess of $3.5 trillion. This has led to an excess of dollars floating around, because of a limp economy and limited opportunities for growth. With a massive supply of dollars chasing few stocks that are organically growing, it is not a huge surprise that these companies are seeing sky-high estimates.
Executives Warn of Risks
A key difference between this bull market and the 2000 bull market is that, this time; executives are not sipping the “kool aid”. The most-recent evidence of this came in a press conference with Elon Musk; he said the Tesla stocks are high. This led to a 3% drop in Tesla’s stock on Friday’s trading.
Elon Musk added that if there is any emergence thought of a long-term plan, then it will be a good choice, although in short-term, it is less clear. Similar comments were made by Reid Hoffman, Netflix’s CEO in a conference call following third-quarter earnings in 2013. Even Musk made similar comments last year when Tesla first hit the $200 level, warning that in the short term, the stock was overextended.
This marks a shift in behavior for Musk. After the stock’s IPO in 2010 at $17, it became a popular target for short sellers who questioned his ambitious visions of building a luxury electrical car and rollout of charging stations across the country. Musk mocked them on Twitter, and his optimism was rewarded as the stock climbed from 17 to its current price of 277, a gain of 1529% in a little more than four years.
Although these warnings from Musk and Hoffman led to selling in the short-term, after a week or so, it had a little impact on investor and traders’ behavior. In both cases, the stock quickly recovered losses, and it charged higher. One similarity between both companies has been the short sellers who consistently target the stocks. 23% of Tesla’s stock float remains short; no doubt these are sitting on heavy losses.
When these shorts cover to close their positions, they buy the stock which creates a bid for the stock. Given the current dynamic of a market with healthy gains for the year and fund managers underperforming, one common strategy to make up for under performance is to target stocks with heavy short interest leading to a squeeze that can produce quick profits.
Besides Musk and Tesla’s performance in exceeding shareholder expectations for growth, the dearth of growth opportunities for investors, and the Federal Reserve’s policies, another drive off the stock is the company’s innovation into new fields. These are the stocks that lead bull markets and see the most overvaluation.
Musk’s comments may lead to some profit taking, but it will not mark a top in the stock price. The only way these momentum stocks are growing is because of a general market correction in which risk premiums expand or the stock begins to underperform leading to momentum traders dumping shares. This can lead to brutal corrections; for example, Netflix stumbled in late 2011, and its stock fell from 270 all the way to 50.