The current market rally resembles the tech led rally of the late 1990s, according to Bloomberg. The difference is that the current bull run’s “valuations are 28% lower.” That means there could be more upside. Of course if you remember how the tech bubble ended, pulling back on risk may be the best idea right now.
Bill Gross has warned investors to dial back on risk. John Hussman explains that a bear market decline of 40% or more right now would be in line with historical precedent. John Rodgers is still talking about gold. These high-profile and smart investors seemingly do not believe the market advance has legs.
That said, they could be early in their bear market calls. After all, Hussman has been discussing the market’s overvaluation for years now. While he might be right in the long-term, it’s awfully hard to sit around and watch a market head higher without you. That means that Gross’ suggesting of pulling back on risk might be a good idea.
Here are a few names that investors might want to consider trimming:
The search giant
Google Inc (NASDAQ:GOOG) is the undisputed search king. It has a dominant position in mobile operating systems and is constantly improving its products and services. It is a great company. However, with the shares at or near all time highs, there are signs of trouble brewing.
The biggest issue is likely to be the company’s margins. It doesn’t earn as much from mobile advertising as it does from Internet advertising. And there are more competitors in mobile than there are online, where Google Inc (NASDAQ:GOOG) virtually owns the market. The company stated these facts in its 2012 annual report. Add in the recent purchase of low-margin Motorola Mobility, and the company looks set to see less money drop from the top line to the bottom line.
The company’s profit margin already dropped 10 percentage points between 2010 and 2012. Top-line growth has masked the margin compression, but that can only last for so long. When investors start to see results slow, they are likely to sell. Consider taking profits off of the table now.
Netflix, Inc. (NASDAQ:NFLX) is another great company. It practically invented the online video business and is easily the most powerful brand in the space. Moreover, it is starting to transition toward being an online TV station. This has included creating its own proprietary content and being more selective in the content it buys.
The shares are heading back toward the all-time highs reached before a poorly handled pricing decision. With the U.S. market nearing saturation and increased competition flowing into online video, however, the company’s home market could become more complicated. In order to keep revenue up, a price hike might be in order. But the last one was bungled so badly that the company and its shareholders are probably a little gun shy.