Practical analysis for investment professionals
28 February 2014

Weekend Reads for Investors: A Building Froth in Stocks

Posted In: Weekend Reads

There is a speculative froth building in US stocks that is hard to ignore these days. Facebook (FB) was motivated to pay $19 billion for mobile messaging firm WhatsApp in order to gain access to their reported 450 million users rather than the company’s meager revenue stream, estimated at just $20 million in 2013. This brings to mind the price-to-eyeballs metric that was first popularized by then–Morgan Stanley (MS) analyst Mary Meeker during the dot-com boom of the late 1990s.

Morgan Stanley made headlines again this week when their auto analyst, Adam Jonas, CFA, more than doubled his price target for Tesla (TSLA), courageously taking his financial model out to the year 2028 to justify his new price objective. Tesla shares, trading at 15 times sales, jumped on the news and are up seven-fold over the past year. The bounce in its stock price was an opportune time for Tesla to announce a convertible note offering which, as Zero Hedge pointed out with some irony, is to be co-led by Morgan Stanley.

With nearly 90% of S&P 500 companies reporting fourth quarter profits, FactSet recently noted that 72% of firms have exceeded earnings estimates, roughly in line with recent quarters. At the same time, 82% of companies issued negative guidance for the first quarter of 2014, compared with an average of 64% over the past five years. Companies’ increasing reliance on lowering the earnings bar remains a trend worth watching.

Here are a few other stories (and videos) you may have missed in recent weeks.

Strategic Thinking

Valuation Matters

Pension Problems

What’s Up with Facebook

Activist Angle

Wall Street (and Washington) Behaving Badly

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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