Dow Jones Today Falls as Speculative Stocks Plunge

Biotechs lead a drop in speculative stocks.

Mar 24, 2014 at 1:31PM

The Dow Jones Industrial Average (DJINDICES:^DJI) was down 52 points, to 16,250, as of 1:30 p.m., accompanied by plunges in speculative stocks around the market. The S&P 500 (SNPINDEX:^GSPC) was down 12 points to 1,854 while the CBOE Volatility Index is up 4.7% to 15.71.

Nineteen of 30 Dow stocks were in the red.

Since November, I have been saying the stock market looks overvalued; I reiterated that point earlier this month by showing how Warren Buffett's favorite metric shows the market is overvalued. Opinions differ, but even the Federal Reserve has called out certain sectors. Earlier this month Federal Reserve Bank of New York Governor William Dudley said, "There are some areas that may be overvalued, such as biotechnology stocks, leveraged loans and farmland."

Biotechs are leading speculative stocks down, with the SPDR S&P Biotech ETF losing 4.2% for the day. Other falling speculative stocks include Tesla, which is down 4.4%; Facebook (NASDAQ:FB), down 5%; Twitter (NYSE:TWTR), down 4.8%; and numerous others. While biotechs have always been a speculative spot of the market, as their chances to succeed or fail are dependent on their drugs working out, the other three companies mentioned are different. No one believes Facebook, Twitter, and Tesla won't be around in the years to come. They have all built large growing businesses that people want to see succeed.

The problem, however, is that the stock prices for these businesses have gotten far ahead of what any reasonable investor should be willing to pay. On a price-to-sales ratio, Tesla is valued at 14 times sales, Facebook at 22 times sales, and Twitter at 43 times sales. If these were price-to-earnings ratios, besides Tesla these would be slightly high. As price-to-sales ratios, investors are paying an absurd amount of money for each dollar of sales, let alone earnings.

Foolish bottom line
While I believe the stock market is overvalued, opinions differ. But with the Federal Reserve committed to low interest rates and pumping money into the economy, who knows how high the market can go? One thing is for sure: It's getting harder and harder to find great companies at good prices. 

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Dan Dzombak has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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