Shooting Star Stocks...Avoid Them

I have written before about the market phenomenon of “shooting star “stocks. Often these stocks involve companies whose products are highly visible and extremely trendy a product that seems to have infinite future sales growth. Investors (for lack of  better word) both individual and institutional flock to thee stocks and as price momentum builds and the price goes up, more buyers flock in. The inevitable result is that the valuations of these stocks make them “priced to perfection” a small disappointment in earnings prospects leads to the stock falling back to earth often quite rapidly.

At that time I had mentioned Lululemon (LULU) which took a large price earlier this week after a disappointing earnings report. It is now trading at half the price of its all-time high

But LULU was just one example. A recent article 

 by Michael Santoli reported the woes of once highflying women’s retailer Chico’s and cited a number of companies which research from Sanford Bernstein sees as potential candidates for leveraged buyouts because of the sharp declines of their stock.

These names are a virtual tour of your local mall all well-known and seemingly popular or (once popular) names in the midst of a booming US stock market at all-time record highs these stocks have seen large stock price declines. The article notes

Within a laggard retail sector, a crowded collection of long-established specialty chain stores selling clothes, shoes and accessories have struggled acutely.

This subset of retail, populated by tired “concepts” now on the wrong side of consumer preferences,

Aside from Chico’s, the list includes Petsmart Inc. (PETM), Urban Outfitters Inc. (URBN), UGG boot maker Deckers Outdoor Corp. (DECK), Guess Inc. (GES), Buckle Inc. (BKE), Steven Madden Ltd. (SHOO), American Eagle Outfitters Inc. (AEO) and Fossil Group Inc. (FOSL).

Shares of these companies are down an average of 33% from their all-time highs,

The lesson for investors…just because the store seems busy or “everybody” is buying or wants the product doesn’t mean the stock is a good buy. Valuations may be high based on expectations of continued sales and profit growth. But being a “concept” by definition means it will be difficult to remain the darling of consumers forever. Better to check valuations rather than the crowds at the mall before buying stock in a company.