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Sizzling stocks that outperform the market by leaps and bounds are often referred to as momentum stocks. They attract heavy attention and seem to charge restlessly higher in a relatively short period of time. However, as this earnings season is proving, momentum stocks can be a shareholder’s worst nightmare.
With roughly 85 percent of the Standard & Poor’s 500 companies reporting financial results, the outcomes have not been impressive. Only about half of the firms have topped net income estimates, and just 40 percent have beaten on revenue. Even more concerning, companies are becoming more cautious on their outlooks. Jeff Cox from CNBC explains, “More than 50 percent of the companies on the broad index have lowered their estimates for the third quarter, while only 21 percent have raised. Analysts have followed in kind, cutting their forecasts for S&P 1500 companies on about a 3 to 1 ratio.”
The weak results and outlooks are revealing which high-flying stocks are ready for lower altitude. Although momentum names take the escalator to the top, they often free-fall on the way down. The latest example of this came from Priceline.com (NASDAQ:PCLN). Shares of the online travel agency surged more than 60 percent earlier this year to reach an all-time high of $774.96. However, shares have been struggling and received a final push over the edge after providing a weaker-than-expected outlook late Tuesday. For the third quarter, the company now expects profit excluding items in the range of $11.10 to $12.10 per share, well below the $12.76 expected by analysts.
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“In terms of the growth assumptions, we said that our forecast reflects the actual results we’ve seen to-date and we’re assuming fairly significant deceleration growth rates from here on – over concern about macroeconomic conditions and our worry that conditions will worsen particularly in Europe which is such a key market for us,” explained Jeffery Boyd, chief executive officer. Priceline also reported second quarter revenue of $1.33 billion, falling short of the $1.35 billion predicted by analysts.
Slowing growth and sales are detrimental to momentum stocks. Shares of Priceline crashed nearly $100, or 15 percent today on the news. The collateral damage also caused competitors Orbitiz Worldwide (NYSE:OWW) and Expedia (NASDAQ:EXPE) to trade lower. Furthermore, Orbitiz reported disappointing financial results of their own this morning, which accelerated its sell-off into a 25 percent haircut.
Priceline is hardly the first high-flyer to feel the side effects of weak revenue. Last month, Chipotle Mexican Grill (NYSE:CMG) shares plummeted 21 percent after missing revenue expectations and saying that the business witnessed a slowdown after April. Netflix’s (NASDAQ:NFLX) momentum broke last year after reaching $300 per share, but experienced a second breakdown after running up nearly 20 percent in the two weeks prior to its latest earnings release. After announcing quarterly results, shares of the online streaming company dropped 25 percent in a single trading day. The recent slew of momentum breakdowns should serve as a reminder to shareholders to not get too caught up in enthusiasm and book profits on the way ride up.
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