Growth Stocks Getting Crushed | Stock Market Investing

Over the last couple of months and especially in the last few days, growth stocks  (also known as momentum stocks) have been getting hammered.  Leading growth stocks such as Twitter (TWTR), 3D Systems (DDD), Solar City (SCTY), Amazon (AMZN), Qihoo 360 (QIHU), FireEye (FEYE), Splunk (SPLK), Palo Alto Networks (PANW), and even Whole Foods (WFM) have seen declines in the 30-50%+ range.

Let’s look at the charts of a few of these now fallen leaders.  These are not good looking charts!

Amazon

Chart courtesy of Stockcharts.com
(Click to enlarge)

Growth Stocks - AMZN chart

Twitter

Chart courtesy of Stockcharts.com
(Click to enlarge)

Growth Stocks - TWTR chart

FireEye, Inc.

Chart courtesy of Stockcharts.com
(Click to enlarge)

Growth Stocks - FEYE chart

Recent IPOs have not fared well in this environment.  Yahoo Finance’s Daily Ticker reported today that data center specialist A10 Networks (ATEN) is off 29% from its recent IPO in March, babysitter web site Care.com (CRCM) is off 42%, and medical data service Castlight Health (CSLT) is off 17% (and almost 70% from its first-day high).

As most of the companies affected are tech names, many analysts are calling this the end of the tech bubble.  Below is a link to an article on online security firm FireEye that sums up this line of thinking:
FIREYE: How A Red-Hot Wall Street Darling Turned Into One Of The Biggest Disasters On The Market

Why the Growth Stock Selloff?

Why the major declines?  First, it is important to understand that a stock’s price usually reflects its business outlook going out 6 to 12 months.  Investors had become too optimistic about many growth stock’s outlook over the last year, leading to unsustainable stock prices.  And as prices went higher and higher, investor optimism crossed over into irrationality.  Second, quarterly results have been disappointing for many of these stocks, with unrealistically high expectations.  In some cases, if the company announced that its earnings grew 50%, the stock still sold off.  A 50% earnings growth rate is phenomenal, but the market was expecting 60%!

Third, at times the stock market moves from embracing risk to shunning risk.  Growth stocks are inherently more risky than value or blue-chip stocks, and that rotation out of growth stocks is now in play.

To understand this better, let’s go over what defines a growth stock.

Growth Stocks

A growth stock is a stock that is growing its earnings rapidly. Most growth stocks fall into the technology area and are usually small-cap stocks. Growth stocks tend to grow their earnings 30% to 50+% a year.  They are usually relatively new companies in fast growing sectors.  Some recent examples are companies in cloud computing, 3D printing, online security, oil & gas exploration, and online businesses.

Over the last year and a half, growth stocks have been the leaders in the stock market, with many making 100% to 300% moves.

Growth stocks usually do not pay a dividend, as they prefer to reinvest their earnings back into the business.

Many investors fall in love with their growth stocks, and don’t sell them when the warning signs appear that the stocks are topping out.  Arguably, most growth stocks are not intended to be held long-term (meaning many years and decades).  At some point their explosive growth ends, and while many remain hugely profitable, the company’s growth rate slows and its stock price stops its meteoric rise.

Earnings Slowdown

As mentioned earlier, growth stocks tend to grow their earnings 30% to 50+% a year.  But as a company gets larger, it becomes harder and harder to continue that growth.

A great example of this is Apple (AAPL).  Apple’s stock exploded during the time it introduced the iPod, iPhone, and iPad.  But the company has now grown into a mature company that is having a hard time growing at its old rate.  And this lack of growth has Apple’s stock price well off its highs.

Another example is Microsoft (MSFT).  As PCs became commonplace in the 1980s and 1990s, its stock rose dramatically as Windows, Microsoft Office, and Internet Explorer became star products.  But for the last decade, Microsoft’s stock has largely gone nowhere.  Microsoft is still making billions each year, but its growth stock days are behind it.

Great Opportunity Coming!

Here at Lifetime Investor we focus on long-term investing in dividend paying stocks, as well as growth stock investing.  This growth stock crash is welcome, as it is removing the irrational exuberance from these stocks and setting them up for purchase at a much better price.

Making The Trade

We teach subscribers to not bottom fish, or try to pick a bottom in the stocks. This can be a very dangerous investing mistake, rather like trying to catch a falling knife.  Rather, we create a watch list and wait for our stock picks to form patterns like a cup with handle or W bottom.  We then buy them under these certain conditions which lowers our risk of loss while improve our investing results dramatically.

We then like to take our growth stock profits and put them into dividend paying stocks that we compound. Compounding can make you rich starting with just a little money. Time is your best ally with compounding, so the earlier you start, the better!

If you currently own growth stocks, it may be prudent to take some profits (if you still have any!).  And always remember to put in a stop-loss order no more than 8% below your purchase price.

To learn more about our stock investing method, please check out my Ultimate Stock Investing System.

 

 

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