Almost three months have passed since we first posted our list of Bubble Stocks 2.0 on July 1, 2019, so we thought a reassessment was in order. Such periodic reassessments can be a humbling, but also a learning experience. This is particularly true in light of the asymmetric nature of the coverage of investments. When a stock is bubbling, like Roku was recently, there is intense interest in the media and on the internet. There is also interest when a stock is falling sharply. But if it drops and stays down, or simply stops rising, interest wanes. People move on to talk about the new stocks de jour. To avoid this bias, it is instructive to make a list of darlings and then follow them diligently for an extended period. One particularly good way to track them is to plot their performance relative to an index. That is what we do in the chart below.
In the chart, all of the bubble stocks 2.0 along with the S&P 500 are indexed to start at the same point of 100. The chart shows that the S&P 500, shown by the heavy black line, was relatively quiescent – varying little from the starting point of 100. In distinction, both Beyond Meat and Roku rocket more than 50% and 80%, respectively, from what we felt were already excessive valuations on July 1, before collapsing back close to 100. All of the other bubble stocks are down with Lyft, Netflix and Uber all off about 30%. Spotify is down 20% and Hubspot and MongoDB are both down more than 10%.
The chart makes it clear that if you invest in such darlings, either or the long or short side, from a fundamental standpoint do not expect a nice convergence to fair value. Heart stopping ups and downs are more the exception than the rule so be sure that your position is not so large than you can stand the volatility.
So where do we stand now on the bubble stocks? We still think the values are on the high side from a fundamental value although much less so in case of Uber, Lyft and Netflix than was the case in July. We will check back again at the end of the year.