Free-falling Snap remains a risky trade
Stocktake: Tesla takes a tumble, exaggerated volatility and how bad investments can scar
Bottom-fishers may be best waiting until the end of July, when Snap’s post-IPO lock-up period expires. Photograph: Lucas Jackson
Things continue to get worse for Snap shareholders, with shares in the photo-sharing company last week falling below March’s $17 IPO price for the first time.
Ordinary investors didn’t get to buy at $17 during the IPO. Demand meant they opened for trading at $24 and peaked at $29 the following day, a far cry from the $15 level to which they fell last week. It could get worse. Prior to the IPO, this columnist warned Snap’s stratospheric valuation meant it looked a bad bet. Even now, the stock trades on 45 times sales, prompting Prof Scott Galloway from the NYU Stern School of Business to dismiss it as the “most overvalued company in the world”. Bottom-fishers may be best waiting until the end of July, when Snap’s post-IPO lock-up period expires and insiders will be free to sell millions of shares. Pre-lock-up negativity is creating an “opportunity”, says Barclays, which suggests investors not pull the trigger until the lock-up deadline passes. MKM Partners notes that, on average, Facebook, Twitter and LinkedIn fell by almost a quarter in the month prior to their lock-up expirations, which tend to mark short-term bottoms. Even a short-term trade is too risky for Galloway, however. “Investing in Snap”, he says, “is like driving drunk.”
Another overpriced glamour stock, electric car maker Tesla, recently fell into bear market territory (a fall of over 20 per cent) following disappointing sales numbers and fears of increased competition. In late May, Stocktake advised investors to be cautious, saying Tesla sported a “head-scratching valuation”. There’s no doubt Tesla, which is still up almost 50 per cent in 2017, could keep falling. It still looks wildly overpriced, with Goldman Sachs warning it might yet halve in price. However, while would-be buyers should be careful, so should short sellers. The shorts have piled into Tesla, but betting against momentum stocks is a dangerous game. Tesla experienced four separate bear markets in 2016. In 2015, it fell more than 20 per cent on three occasions. In 2014, shareholders experienced no fewer than five different bear markets. In other words, Tesla has experienced 13 bear markets since 2014; the S&P 500 has yet to experience one. Nevertheless, the stock has ultimately surged higher, costing shorts a bundle in the process. The latest correction may prove similarly shortlived. You need a strong stomach to be long on Tesla, but an even stronger stomach to be short.
US stocks are not as expensive as they seem and are poised to continue rising but Europe remains a better prospect. That’s according to JPMorgan’s latest quarterly Guide to the Markets, which downplays US valuation concerns by pointing out they are only slightly above their 25-year average. Non-US markets are “slightly cheaper, but not dramatically so, and are broadly in line with their long-term averages”. More important than valuation is the fact the US earnings recovery is well-advanced, but the earnings recovery in Europe is “just getting under way after five years of contraction”. European markets have been very strong in 2017, with surveys showing money managers are now overweighting Europe relative to the US. JPMorgan says it’s not too late to get on board, however. Political concerns led to €58 billion in outflows in 2016; with 2017 inflows totalling €18 billion, the European equity rally has room to run.