Readers of my column know that the market is at its third most expensive in history. There are number of stocks that are supporting truly outrageous valuations. In fact, many of the so-called “blue-chip stocks” are trading at excessive valuations. And while a lot of attention is given to the FANG stocks, a group of six ecommerce stocks which include half of the fang group are up 600% since the worst of the financial crisis.
According to analyst Michael Hartnett at Bank of America Corporation (NYSE: BAC), this ecommerce stock bubble is the third largest bubble in the past 40 years, and quite possibly could become the largest bubble of all time.
The six ecommerce stocks he refers to are Amazon.com Inc. (NASDAQ: AMZN), Netflix Inc. (NASDAQ: NFLX), Alphabet Inc. (NASDAQ: GOOGL), Twitter Inc. (NASDAQ:TWTR), Facebook Inc. (NASDAQ: FB), and eBay Inc. (NASDAQ: EBAY).
Take a look at this chart, courtesy of Bank of America Merrill Lynch Global investment strategy and Bloomberg.
Yeah. That looks like a parabolic graph on e-commerce stocks if I’ve ever seen one. If you don’t know already, parabolic increases like this historically end in parabolic free falls, much like every other chart in this graphic.
Valuations on Ecommerce Stocks
I think there is an argument to be made that Alphabet stock is actually fairly valued. Backing out net cash, Alphabet trades at about 21 times trailing estimates and is slated to grow earnings of 20% the next year. Facebook’s valuation is still a little stretched, trading at 28 times trailing earnings, with the next five years average annual EPS growth pegged at about 26%.
The other ecommerce stocks, however, are outrageously overvalued.
Hartnett believes that exposure to the stocks should be substantially reduced. Beyond the 620% return over the past seven years, Hartnett also sees the entire tech sector as being overvalued. Removing tech from the S&P 500 would take the index from its current level of near 2600 down to 2000.
Hartnett also points out that tech and ecommerce stocks generate almost 25% of domestic earnings-per-share. Apparently, this level is rarely exceeded, and worse, often is a precursor to a top.
Bigger Ecommerce Considerations
There are other macro issues that should concern investors regarding these stocks. While Congress made itself look pretty stupid during the Zuckerberg hearings, there are increasing calls for something to be done on the regulatory front regarding privacy. This could be the kind of existential event that throws the entire sector into a panic.
The problem is that many of the stocks in the e-commerce sector are also momentum plays. Momentum can shift very quickly and very dramatically in the other direction.
What should you do if you hold the stocks? The first question is whether you think any of them truly have long-term potential to grow into their valuation. If you think that’s the case then you may want to hold onto little pieces of it. Otherwise, I would suggest selling out a portion of your holdings. Let’s say 25%. Then I would set stop losses for 25% at various technical support levels.
What I would not do is believe that everything is going to work out just fine. This is a bubble. It will pop.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected]