It has been an ugly 12 months for momentum stocks. Take a look at the 52-week ranges on some of these victims (and yes, they are now sitting near the bottom of these windows):
Green Mountain Coffee Roasters (NASDAQ:GMCR) — $17.38 to $115.98; -85% peak to trough.
Netflix (NASDAQ:NFLX) — $60.70 to $285.50; -79% peak to trough.
Sodastream (NASDAQ:SODA) — $27.60 to $79.72; -65% peak to trough.
Abercrombie & Fitch (NYSE:ANF) — $29.51 to $78.25; -62% peak to trough.
Now, red-hot growth stock Chipotle (NYSE:CMG) is likely to be part of this list. The stock lurched down as much as 25% Friday after Chipotle’s ugly earnings report. It ended the day down 21.5% at $316.98. Its 52-week high of $442 is long behind it.
It’s too late for you to protect yourself if you were riding high in any of these five crash-and-burn stories. But for those of you who chase momentum stocks, here are three you should play close attention to as they report earnings of their own on Tuesday.
To be clear, danger isn’t imminent in any of these picks. Indeed, I actually expect all of them to post pretty decent results — and maybe even get a pop in share prices. So, don’t see this as a sell recommendation.
I’m simply trying to remind you that what goes up also comes down. And since Buffalo Wild Wings (NASDAQ:BWLD), Under Armour (NYSE:UA) and TripAdvisor (NASDAQ:TRIP) have all gone up dramatically … well, these stocks are also at risk of a reversal.
Clearly, there’s a risk in getting out too soon. While I expected the crash in Chipotle, I was admittedly premature when I called CMG one of five “surefire shorts” for 2012 because it had been up 20% year-to-date through July 19 — a nice return for those seven intervening months. But my overall thesis — that inflation would start eating at margins and that growth simply couldn’t keep up with high expectations — eventually proved itself out.
So, if you disagree with the timing of my skepticism in BWLD, UA and TRIP that’s fine. But keep the risks in mind down the road.
And it’s worth noting that if you have seen big appreciation in one of these positions, it may be wise to sell part of your holding and rebalance your portfolio to protect profits rather than letting it ride. That’s just wise portfolio management.
But enough disclaimers; here are the details:
Buffalo Wild Wings
I’ll start with Buffalo Wild Wings, another a restaurant stock like CMG, because this industry is very much illustrative of how and why momentum stocks behave like they do.
First, some broader commentary, via four 10-year charts from four very different restaurants — Krispy Kreme (NYSE:KKD), Red Robin Gourmet Burgers (NASDAQ:RRGB), P.F. Chang’s China Bistro (NASDAQ:PFCB) and Cheesecake Factory (NASDAQ:CAKE).
The trajectories aren’t exactly the same, but as you can see there is a clear tendency for restaurant stocks to race upwards amid rapid growth … and then crash and burn after they’ve become overexpanded, diners get bored and there’s no way to improve same-store sales.
According to a few industry reports, Buffalo Wild Wings is one of the Top 10 fastest-growing restaurant chains in the U.S. Of course, Chipotle is No. 1 on that list … so what does that tell you?
BWLD’s growth is tangible, no doubt about it. The stock has more than tripled since early 2009 (the Dow is up only around 42%), thanks to rapid expansion. The chain had around 650 restaurants at the end of 2009 and now boasts over 835, according to company reports.
But BWLD expects to double that in the near future. “Our plans include a development pace to achieve 1,500 locations in North America in the next five to seven years,” President and CEO Sally Smith said in the last earnings call.
Buffalo Wild Wings reports on July 24, and the numbers could very well be great yet again. In February, the stock soared on strong guidance. And after Q1 earnings in April jumped 22% and revenue soared 38%, the stock managed to weather the overall market troubles seen this spring.
But judging by the fact that shares slumped nearly 3.5% Friday — the same day CMG crashed — it’s safe to say investors understand these restaurant success stories don’t last forever.