MorningWord 3/20/13: High Growth, High Valuation FAILS, $LULU, $WFM, $AMZN, $CRM

by Dan March 20, 2013 9:23 am • Commentary

MorningWord 3/20/13:   On the heels of LULU’s earnings warning Monday evening  and subsequent stock decline yesterday, we had a quick little discussion on the Fast Money desk last eve about some prior market leaders losing a bit of their mojo of late.  LULU had been showing relative under-performance for weeks (down about 12% on the year as of Monday’s close), in a very similar pattern to WFM, since its own earnings disappointment in February.  What I find most interesting about the price action in these 2 stocks is that both receive nearly the entirety of their revenues from North America, the one place on the planet where there appears to be some optimism about the consumer.

For good measure, let’s throw in the performance of UA, also a former high growth, high valuation performance leader that has been unable to get anything going since making new all time highs in Q4 2012.  Much like WFM and LULU, UA also gets most of their sales from NA.   The 2 year chart of all three shows the tremendous run up, almost in lock step with one another, and how they all peaked at some point in the second half of 2012.  What the chart doesn’t show is the bifurcation with the broad market or consumer discretionary sector (specifically the XLY) which are within a couple % of all time highs.

[caption id="attachment_23878" align="aligncenter" width="589"]2 yr chart of LULU vs WFM vs UA from Bloomberg 2 yr chart of LULU vs WFM vs UA from Bloomberg[/caption]


I am not exactly sure what you do with this, but I do think it is important to note that at what could be the late stage of the recent leg of the bull run,  investors are becoming a bit more discerning about the horses they want to ride from here on out.

The other group of stocks that seem vulnerable to me going forward are high valuation tech names, that have shown great relative performance throughout the fits and starts of the last 2 years, but are not keeping pace with the rally this year.  The performance, or lack thereof, by the likes of AMZN, CRM and EBAY is a bit curious to me, particularly since recent market milestones of the Dow’s all time highs and the SPX coming withing 3 points of its all time closing high.  The 5 month chart of the SPX (highlighting the Nov Lows) vs the previously mentioned tech names shows the recent break after a period of high correlation.

[caption id="attachment_23879" align="aligncenter" width="589"]SPX vs CRM, AMZN, EBAY from Bloomberg SPX vs CRM, AMZN, EBAY from Bloomberg[/caption]

Again, Bulls could argue that there is a healthy rotation out of some prior leaders that may already be discounting a fair bit of good news, for every LULU they will show you a GPS, for every AMZN they will show you a GOOG.  I get all that, and I am not for a minute saying this is the “Tell”, but I sure want to keep a close eye on these relationships.   This could very well be a distribution phase as the market rally attempts to broaden out, but I will tell you that charts like CRM make me a tad nervous for high valuation, high growth stocks.  Since reporting better than expected results in Feb and the stock making new all time highs, the stock had a failed breakout and has since retraced almost the entire earnings infused move.  This is not the sort of action I would expect to see from a Tech leader as the Nasdaq flirts with 6 year highs.  This thing could have $160 written all over it in a 5% broad market decline.

[caption id="attachment_23880" align="aligncenter" width="589"]CRM 1 yr chart from Bloomberg CRM 1 yr chart from Bloomberg[/caption]


So you get my point.  Not sounding alarm bells just yet, but domestically focused high end consumer taking it on the chin, and recent under-performance from some high growth tech leaders could signal some buyers exhaustion rather than basing for new highs.