Editor's note: This commentary originally appeared on Real Money Pro at 7:00 a.m. on Feb. 2. Click here to learn about this dynamic market information service for active traders.
Under Armour(UAA) - Get Report(UA) - Get Report was among this week's share price disasters. Those caught holding it saw about 25% of their value wiped out following the company's latest quarterly report and analyst meeting.
However, that daily drop was nothing compared with the full decline of almost 59% from UAA's previous all-time peak in 2015. At that pinnacle, UAA fetched about 100x trailing earnings, a clearly unsustainable valuation.
UAA's earnings per share grew in 2016, yet the stock was massacred as price-to-earnings compression took its toll. At Wednesday's quote of $21.70, UAA still trades for more than 37x non-GAAP trailing 12-month earnings per share.
Market historians would have noted Under Armour's similar pattern from 2007's peak, at north of 70x earnings. Traders who didn't exit back then suffered a greater-than-83% drawdown on the way to getting back to even. It took more than four years to finally break out permanently above UAA's 2007 high.
Chipotle Mexican Grill(CMG) - Get Report provides another example of a seductively fast-growing stock that managed to suck traders in at ridiculously high valuations. CMG's 2007 peak occurred at 73x trailing EPS. Like UAA, CMG cratered in 2008 and took about two and a half years to regain its prior high.
A nice run through the early part of 2012 then took CMG back to more than 50x forward earnings. Nimble traders had a chance to sell way above that year's top but, about five years later, as of Feb. 1, 2017, continuous shareholders are underwater vs. 2012's high. They received no dividends along the way.
Amazingly, buyers at Wednesday's quote near $420 are still paying almost 49x forward estimates, even if profits recover from under a buck, in a troubled 2016, to $8.64 per share.
Owning CMG or UAA at ultra-high P/Es, was a bad idea. Ulta Beauty(ULTA) - Get Report and Nvidia(NVDA) - Get Report are two current market darlings. Each sells for a nosebleed valuation on both absolute and historical levels.
ULTA went three years without progress from 2007 through 2010. More recently, it treaded water for about a year and a half from a P/E of about 42x. ULTA still trades not far from its all-time high. It commands more than 42x trailing EPS for the fiscal year ended Jan. 29, 2017.
Avoid the temptation to ride this wave all the way to shore. Value Line thinks ULTA's sustainable P/E multiple might be more like 26.5x. Applying that P/E to 2017 estimates would only support about a goal of about $210.
NVDA was the best-performing stock in the S&P 500 last year. It has continued to be hot so far in 2017. Unfortunately it's become so well loved and desired that it now costs more than 47x trailing earnings.
Maybe this time really is different. In the past, though, sharp run-ups in NVDA were always followed by equally quick and brutal declines. The stock's 2007 high was not definitively exceeded for more than eight and a half years.
Buyers near the stock's January 2011 peak didn't get even for almost four and a half years.
If you are lucky enough to be sitting on large gains in ULTA or NVDA, consider locking in gains while the going is good.
Use knowledge of what happened to holders who didn't sell out of UAA or CMG to remind yourself to "know when to fold 'em."
At the time of publication, the author held no position in the stocks mentioned.