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TheStreet Open House

Nasdaq Growth Names Offer No Safeties

Stocks in this article: ^IXICFEYEYELPFBPNFLX^DJI^GSPC^IXIC

NEW YORK (TheStreet) -- After the recent selloff in the Nasdaq , it seems appropriate to reflect on Ben Graham's observation, over 80 years ago, that "in the short run, the market is a voting machine, but in the long run, it is a weighing machine."

Leading the decline were popular, richly valued, momentum names like FireEye (FEYE), Yelp (YELP) and Facebook (FB). In early March, each of these companies had an enterprise value of more than 10 times trailing revenue, reflecting investor enthusiasm and great expectations for future growth. However, these companies are characterized by sky-high price-to-book and trailing price-to-earnings multiples that leave little room for error. ^IXIC Chart ^IXIC data by YCharts

Portending trouble ahead is the fact that, even after the recent selloff, these companies and other high-flying tech names still trade at rich multiples. In fact, FEYE, YELP and FB still trade well above 10 times trailing revenue, as of April 8, 2014.

The year prior to the selloff had seen a large run-up in these sorts of companies' share prices. Even tech companies with lower margin businesses -- like Pandora (P), with its variable music royalties, or Netflix (NFLX), with its content licensing/production and video-streaming expenses --  continue to trade at high revenue multiples in anticipation of better economics and future growth.

With a wide-open IPO window, nearly every week sees a highly anticipated tech IPO experience a big first-day pop. If the increasing number of these richly valued growth companies fall short of their growth forecasts and/or experience valuation multiple contraction, the floor could come out from under momentum and growth investors. Risk-on behavior has become the norm, and investors chasing returns have driven up asset prices. The last few weeks should be a wake-up call for investors who may have been lulled into a false sense of security by the multi-year bull run. It should serve as a reminder that chasing popular growth and momentum companies, without a sense of intrinsic value, can be hazardous to your wealth.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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