Sizemore on Varney & Company: Momentum Stocks Lose Their Momentum

I joined Charles Payne, Scott Shellady, Nicole Petallides and Lauren Simonetti today on Varney & Company’s Halftime Report.

First item on the agenda: the selloff in biotech shares.  The iShares Nasdaq Biotechnology ETF (IBB) was flat today after being down heavily the past two trading days.  Biotech has been one of the best-performing sectors over the past year.  So is the selloff a bad sign for the market?

Scott argues that the selloff in biotech shares has little to do with biotech news and more to do with a sluggish economy.  I agreed with Scott that the selloff had little to do with biotech and added that momentum stocks across the board have sold off.  To toss out a couple examples, Tesla Motors (TSLA) is down about 17% from its recent high, Netflix (NFLX) is down about 19%.  The iShares Nasdaq Biotechnology ETF is down about 13%, though some of its holdings are down substantially more.

Corrections like these are normal and healthy, of course.  But given that biotech as a sector appears to be in the late stages of a bubble, I wouldn’t view the selloff as a buying opportunity.  When momentum stocks lose their momentum, it’s best to book your winnings and move on.

Case in point?  Gilead Sciences (GILD).  Charles Payne asked if Gilead was a buy after the biotech rout.  I argued that while Gilead was as close to a “blue chip” as you’re likely to find in the volatile world of biotech, there was too much hot money already in the stock.  Anyone investing today runs the risk of getting trampled as the hot money runs out the door.

Next item on the agenda?  Sonic Corp (SONC) beat its earnings estimates and finished Tuesday’s trading up over 11%. Sonic has had a fantastic run, having nearly doubled in the past year.  At 34 times trailing earnings, Sonic is by no means cheap.  But its earnings are growing at a nice clip, and its 57% return on equity puts fast food competitors like McDonalds (MCD) and Burger King (BKW) to shame.  Charles Payne joked that he followed Peter Lynch’s advice to “invest in what you know,” he’d be a buyer of Sonic.  I would agree, and would add that a fresh-made cherry Dr. Pepper is likely in my future this evening.

Finally, we get to Varney’s Tech Tourney March Madness: Netflix vs. IBM (IBM).  Scott chose Netflix, noting that the company was a major disruptor.  While I agree wholeheartedly that Netflix is a disruptor (I’ve called it a “revolutionary company” in the past), its price is a deal breaker for me.  Even after its recent selloff, it trades for over 200 times trailing earnings.

IBM, meanwhile, has seen its share price go sideways for two years and trades for a modest 13 times earnings.

What’s the story behind IBM’s lackluster performance of late? Expectations.  When Warren Buffett began buying the company two years ago, it had an initial jump.  But as the “Buffett glow” started to wear off, investors noticed that IBM’s revenue growth has been flattish for years.  In an environment in which corporations are slashing costs and postponing needed investment, this is not all that surprising.  It is, however, not a condition that can last forever.  As corporate spending picks up in the next year, I expect to see IBM’s services businesses do quite well.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.