It’s always a good idea to see if your winners have gotten ahead of themselves, especially when they’re momentum stocks.
On Tuesday, JPMorgan Chase & Co.’s head of U.S. equity strategy warned clients that momentum stocks look too pricey for their own good. Indeed, with the exception of the tech bubble, momentum names haven’t traded at such a wide premium to value stocks since 1980.
Analysts fear a more dovish Federal Reserve and stable or weaker dollar would offer relief to troubled emerging markets and related commodity-linked equities.
As such, beaten-down value stocks could fall back in favor with investors on a rebound trade. While big, liquid momentum stocks could pay the price.
With that as the backdrop, JPM identified five blue-chip momentum stocks to avoid based on macroeconomic factors and market dynamics.
General Electric: The market really loves that General Electric Company (GE) is ditching its financial businesses to become a pure-play industrial, but the easy money may have already been made for now. Shares are up about 18% over the past 52 weeks, a span in which the broader market is down more than 8%. Trading at nearly 17 times forward earnings, it’s possible that the GE stock price is getting a bit stretched. The stock’s forward price-to-earnings multiple has averaged less than 15 over the last five years, according to Thomson Reuters Stock Reports.
Amazon: Even with a bad start to 2016, Amazon.com, Inc. (AMZN) stock has generated big prices gains over the past 12 months. The e-commerce company’s stock is up 40% over that time. That said, Amazon stock is now caught in a severe downtrend. Since notching an all-time high at the end of December, shares have dropped more than 20%. AMZN is a volatile stock to begin with, but now that the momentum is leaking out of the name, AMZN may be looking at a period of consolidation.
Disney: As expected, the media and entertainment giant rode Star Wars: The Force Awakens to boffo quarterly results. Unfortunately, widely expected weakness in the critical ESPN business also came true. Walt Disney Co (DIS) suffered major selloffs last year on cord-cutting fears, and now that the run up ahead of Star Wars is over, DIS stock could be spent on a momentum basis. Shares are already lagging the S&P 500 this year by about 3 percentage points. Like AMZN, a history of volatility could point to more relative underperformance ahead for DIS stock.
McDonald’s: Breakfast has never tasted so good. McDonald’s Corporation (MCD) decision to serve breakfast throughout the day pulled MCD out of a prolonged funk. Too bad we’re seeing signs that the trade is puttering out. MCD crushed the broader market over the last 52 weeks with a 25% gain, but the run to an all-time high reversed it the beginning of February. MCD is still beating the S&P 500 — it’s essentially flat for the year-to-date — but the boost from rejuvenating sales might be spent.
Starbucks: It had a heck of a run last year, but now Starbucks Corporation (SBUX) may be stuck trading in a range as investors digest gains. True, Starbucks stock has held up well YTD, essentially matching the performance of the broader market. Momentum, however, appears to be flagging. Shares are down about 6% so far this year. It’s not uncommon for a stock to follow a big year with something more disappointing. It’s a cliche, but it’s true: The higher they fly, the harder they fall. After rising close to 50% last year, Starbucks stock could be a victim of that trend.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
