CNBC Stock Blog

'Momo' Stocks Dumped During Bloody October

Robert Holmes

The U.S. stock market has risen almost 10 percent so far in October, one of the best monthly performances in two decades. But investors in companies including Netflix and First Solar have been left out of the rally.

Those are called momentum, or momo, stocks, which refers to companies that rise for intangible reasons, not for their fundamentals. Before this month, they outperformed the broader market since the March 2009 bottom.

But as earnings growth expectations have sagged due to fears of the debt crisis in Europe and a slowdown in emerging markets, some high-flier stocks have been decimated.

Before Tuesday's 2 percent drop, the Standard & Poor's 500 was on pace for its biggest monthly performance since 1991. Still, Netflix , for just one example, has dropped more than 30 percent in October.

Investors who bet on high-flying stocks have learned a painful lesson in chasing momentum.

"Educate yourself on beta," Robert Pavlik, chief market strategist with Banyan Partners, says with a laugh. "That's what you get. When you play with a hot piano, your fingers get burned. A good way to put it is that it's an exercise in risk management. You have to get educated and prepared with risk management."

It's been mostly a string of bad headlines that have sunk momo stocks.

Netflix has been the prime example after CEO Reed Hastings bungled the separation of the company's DVD-by-mail and Internet-streaming services, as well as an unfavorable price increase.

Shares of Netflix took a sharp hit Tuesday after the company said late Monday that subscribers were leaving the service at a rapid clip and its much-ballyhooed international expansion was more costly than expected. Before this month, its shares had more than tripled since late 2008.

Green Mountain Coffee Roasters has been another beaten-down momentum stock.

After doubling over the past year, Green Mountain stock has tanked 30 percent this month after hedge fund manager David Einhorn gave a presentation on why he is shorting the stock, calling attention to insider sales and the company's poor transparency.

Shoemaker Crocs dropped 30 percent on its third-quarter earnings report. The stock, which is up 1,000 percent over the past three years, tumbled after the company cut its earnings and revenue outlook, and guided fourth-quarter sales below analysts' estimates.

Most recently, First Solar joined in the momentum collapse after the company said CEO Rob Gillette, hired less than three years ago, is leaving. Shares of the largest solar company in the U.S. are down 28 percent this month, after rallying more than 80 percent in the past five years.

Not all momo stocks have been taken out behind the woodshed.

Chipotle Mexican Grill is matching the market's 10 percent return this month, after a stellar quarterly earnings report.

LinkedIn, criticized as one of the new round of dot-com stocks set to collapse, also has jumped 10 percent in October.

But as Jim Cramer noted on Real Money exactly one week ago, "It's not enough that stocks tend to trade together. The high-multiple stocks tend to trade in lockstep with each other." For investors in these high-fliers, that observation is tough to stomach.

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