4 Prime Stocks That Are Losing Their Power

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Source: Thinkstock

Source: Thinkstock

When stocks or other assets rise in value, investors become enthusiastic about their future prospects. Furthermore, the rising stock price serves to validate this conviction — the gambler whose activity is rewarded becomes convinced that his or her actions are rational in nature. However, fundamentally, this makes no sense — a rising asset price means that there is less validity to the bullish case, and vice versa.

So it shouldn’t surprise anybody that several of the stocks that led the market higher in the past couple of years are lagging significantly in 2014. We find that many stocks reached absurd valuations, and again, investors rationalized these valuations because the market was rewarding them. After all, if a stock trades at 100 times earnings, you would feel pretty smart having purchased it at 70 times earnings even if it is only worth 15 times earnings.

If we look at the bifurcated market of 2014, we find that prudence and fundamental analysis seem to be paying off; those who avoided, or better yet, those who shorted the stocks I am about to mention saw right through the momentum and rightfully arrived at the conclusion that they simply had to come down. Not only are these stocks down for the year, but I think they have further to go. Let us see why.

1. Amazon

Amazon (NASDAQ:AMZN) is a business that touches nearly all of our lives — it is a convenient online platform for purchasing just about everything. Given the company’s competitive advantage, investors were convinced that it didn’t matter that Amazon wasn’t generating any profits or paying any dividends. Everything was going back into the business, and investors were just fine with that.

But lately, this hasn’t been fine. The story today is basically the same as it was at the beginning of the year — the company is growing revenues, and it is the leader in online commerce. But shares are down 27 percent versus the S&P 500, which is up about 2 percent. I think a lot of holders of Amazon shares are coming to the realization that it is better to put your money in a boring, stable, and profitable business such as Exxon Mobil (NYSE:XOM) — which is hitting all time highs — than a high flier that might, some day in the future, report a profit.

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