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Nov. 23, 2019, 4:11 p.m. EST

Momentum stocks are down, but not for the reason you may have thought

Institutional investors have indiscriminately dumped shares of fast-growth companies after earnings reports

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By Beth Kindig

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The chart above also shows large-volume selling, suggesting institutional positions. The selloff volume is much higher than it was during the fourth-quarter decline.

Veeva Systems

Veeva Systems /zigman2/quotes/202850210/composite VEEV +3.04%  is another example. The company’s operating margins expanded from 17% in 2016 to 27% in the most recent quarter. Veeva beat on earnings, reporting 55 cents per share, compared with estimates of 48 cents. Full-year guidance exceeded analysts’ estimates. Veeva is also strong on cash flow, having increased it from $40 million in 2014 to almost $400 million in the most recent quarter. The company has $1.4 billion in cash reserves and no debt.

Despite this, Veeva’s stock price has dropped 12% from its three-month high of $168.42 and was immediately down 3% after earnings in late August.

Pinterest

Pinterest /zigman2/quotes/211319641/composite PINS +4.45%  had one of the more interesting reports this earnings season. The company beat on EPS of 1 cent compared with an expected 4-cent loss. The company also beat on monthly active users, with 322 million reported versus 311.8 million expected. Analysts had forecast $280.6 million in revenue, while Pinterest reported $279.7 million.

The company actually raised guidance on the low end, but analysts elected to set the bar higher, and therefore, it was reported as lowered guidance. The miss of less than $1 million resulted in a 21% share-price drop, or a $3 billion loss in market cap.

Earnings erosion

The overall market is experiencing an earnings erosion, with a 4.1% decline from a year earlier, exceeding the estimated 3.3% decline, as discussed by MarketWatch’s Phil van Doorn. On that note, both Intel /zigman2/quotes/203649727/composite INTC +0.51%  and Apple /zigman2/quotes/202934861/composite AAPL +2.33%  reported flat year-over-year growth, yet the stocks rallied post-earnings as the market was pacified by EPS numbers that were goosed with buybacks.

The tech decline in 2018’s fourth quarter created a lot of fear, as did the September “value rotation,” yet the October earnings selloff was more muted. It could have been that the recent declines weren’t as orchestrated by large institutions or as impactful on investors’ psyche.

The truth is that many of these growth stocks are stronger than they were in the previous quarter. The stocks that declined have one thing in common: They produced substantial gains in 2019, which means there was cash to pocket. They were not dogs in the first half of 2019; they were actually market leaders.

Know your winners

Instead of a rotation into value, the current trend reveals many institutions are, in fact, taking gains and rotating into cash. While many prognosticators are predicting a recession or black-swan event, investors haven’t panicked. There has been a slow and steady drain.

In a previous analysis on MarketWatch, I had cautioned investors to know their winners as the market clearly did not have a method for differentiating beyond traditional valuation metrics. The safest way to trade tech stocks is to align investments with an overall macro technology trend in addition to fundamental analysis (the macro trend will prevail), and to have an exit strategy, such as a trailing stop, for risk management.

We’ve seen some stocks quickly recover, such as Roku, and others that haven’t rebounded, such as Veeva and Alteryx. Even the more solid recoveries suggest they are boosted by momentum and swing traders as they remain between support and resistance, as well as retail investors, as implied by lower volume.

The true test will be the upcoming cloud-software earnings reports to determine if the pattern will continue.

The writer has owned Roku shares since the IPO, and also call options on Pinterest.

Beth Kindig is a San Francisco-based technology analyst with more than a decade of experience in analyzing private and public technology companies. She owns Roku shares. Kindig publishes a free newsletter on tech stocks at Beth.Technology and runs a premium research service.

/zigman2/quotes/202850210/composite
US : U.S.: NYSE
$ 252.40
+7.45 +3.04%
Volume: 678,069
July 8, 2020 4:00p
P/E Ratio
127.66
Dividend Yield
N/A
Market Cap
$36.78 billion
Rev. per Employee
$397,149
loading...
/zigman2/quotes/211319641/composite
US : U.S.: NYSE
$ 27.00
+1.15 +4.45%
Volume: 16.27M
July 8, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$15.16 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/203649727/composite
US : U.S.: Nasdaq
$ 58.61
+0.30 +0.51%
Volume: 13.28M
July 8, 2020 4:00p
P/E Ratio
11.35
Dividend Yield
2.25%
Market Cap
$246.88 billion
Rev. per Employee
$659,665
loading...
/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 381.37
+8.68 +2.33%
Volume: 29.27M
July 8, 2020 4:00p
P/E Ratio
29.90
Dividend Yield
0.86%
Market Cap
$1615.36 billion
Rev. per Employee
$1.98M
loading...

Beth Kindig is a San Francisco-based technology analyst with more than a decade of experience in analyzing private and public tech companies. She publishes a free newsletter on tech stocks at Beth.Technology and runs a premium research service.

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