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.
Athletic apparel stock Under Armour is up nearly 300% since early 2009, and up 37% year-to-date in 2012. Its fiscal 2011 revenue of $1.4 billion doubled the $725 million put up in fiscal 2008 — proving that the recession didn’t matter one bit to this company.
But with a trailing P/E of 51 and a forward P/E of 32, it’s clear that expectations are high. And eventually the bar is going to be out of reach for even this high-jumper of a stock.
Of course, there’s plenty of spring in UA’s step right now. In the first quarter, net revenues increased 23%, and net income rose 21% year-over-year. And on Tuesday, we could see another strong showing.
But Wall Street seems to be getting skeptical. UBS downgraded UA stock on June 21 to neutral from buy, joining the majority of analysts with a lukewarm view of the stock. At the end of June, Under Armour was sporting 12 hold ratings, compared to 10 buys and even one sell.
UBS’s target was still above $100 a share — a doubler from here — so let’s not act like Under Armour is doomed. But the cooling expectations are worth noting as part of a broader trend.
A lot of cash is at play in apparel, particularly in athletics. Under Armour has recently been riding high on strong shoe sales. But behemoth Nike (NYSE:NKE) isn’t going to take UA’s ascent lying down, and you can only launch so many new products to tap into consumers’ limited budgets.
TripAdvisor is a travel information and reviews portal that was spun off from Expedia (NASDAQ:EXPE) in 2011, and the sky has been the limit for this pick. The stock was the second-best performer in the entire S&P 500 for the first half of the year and one of the top 5 S&P stocks for Q2.
The run has been impressive, and may continue for a bit longer. But watch out for the risks.
One is competition. Yelp (NYSE:YELP) is a trusted brand in reviews, and clearly Google (NASDAQ:GOOG) has its eyes on the category after its 2011 purchase of the iconic Zagat restaurant guide.
Another risk is that growth has depended largely on international expansion. Right now, TripAdvisor is doing a good job introducing itself to new customers in new areas like China to offset soft Europe and U.S. sales. But expansion gets you only so far.
Lastly, while TRIP posted strong first-quarter revenues growth of 23% and topped expectations, earnings were only up about 2%. And since the company went public only in 2011 after its spin-off, there’s not a whole lot of track record to plot a long-term trajectory.
The forward P/E of about 25 on fiscal 2013 earnings isn’t out of this world. But it is a bit rich. Parent Expedia has a P/E of around 15.
Of course, any earnings at all are noteworthy. TripAdvisor is soundly profitable due to its booking partnership with Expedia, unlike Yelp or service reviewer Angie’s List (NASDAQ:ANGI), which haven’t figured out how to move beyond being a forum and into efficient monetization.
But as restaurant stocks have shown us time and time again, you can bank on expansion as a growth vehicle only up to a point. TRIP’s international growth engine can’t run forever.
Jeff Reeves is the editor of InvestorPlace.com, and author of “The Frugal Investor’s Guide to Buying Great Stocks.” Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks mentioned here.