It’s the outlook, stupid!
How can this yawning gap be explained in a way that makes sense? Has the cause and effect relationship been inversed? Desperate and unable to identify meaningful fundamental drivers, analysts resort to chasing fata morganas trying to create plausible causes out of thin air:
“Stocks moved higher on hopes for a recovery and the improving outlook,” are the rationales most often supplied for lack of any better reasons that can be verified and substantiated. This obviously sounds much better than, “stocks rose on the back of phony growth from cheap money financed by higher debt.”
Granted, while the top line development has been a disaster, bottom lines have been improving steadily. However, while the results of effective cost management have produced rising EPS, one must know that this is simply not sustainable with prolonged flat and/or negative top line growth and no credible signs of future growth. Therefore, it is simply not a good enough rationale for pumped up share prices on steroids.
The outlook, the outlook, oh, the most splendid outlook! Have you ever wondered what happens when the outlook fails to materialize in the expected way? Case in point: AEP Industries (NASDAQ:AEPI). While the company’s top line had improved markedly during the past four years, the last 12 months show even slightly negative revenue growth, just as with our select stocks. Yesterday, its hyped stock did take an overdue mighty fall of 20% (and more to come!), when its results and — guess what — “the outlook” disappointed Wall Street.
“Outlook,” where art thou?
Be afraid, be very afraid! When all market participants, in particular the learned experts supposedly in the know, join hands in unison to confirm the trend and its prolongation, this is the mother of all red flags.
“My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”
-John Maynard Keynes
Not too long ago, the final phase of Apple Inc. (NASDAQ:AAPL) Almighty’s upsurge to its inflection point was accompanied by unanimous consensus and (maybe not so) smart money conviction buys. Speaking of which: Where have all those Apple Inc. (NASDAQ:AAPL) $1,000 bulls gone? Did they vanish into the haze, or maybe the iCloud?
Remember, that those who do not know their history are condemned to relive it! The analyzed stocks are the first dominoes to tumble, long before those with solid fundamentals, when investors will finally come to realize that their emperors have no clothes.
Karl Ege is short Whirlpool Corporation (NYSE:WHR), Saia Inc (NASDAQ:SAIA), Snap-on Incorporated (NYSE:SNA) and AEP Industries (NASDAQ:AEPI). The Motley Fool has no position in any of the stocks mentioned.
The article Stocks Showing Serious Bubble Symptoms originally appeared on Fool.com.
Karl is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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