Tech Gets Crushed as Market Sell-Off Continues

The Dow Jones Industrial Average is down today, but the Nasdaq is where the big sell-off is, and growth stocks are struggling again.

Apr 10, 2014 at 3:30PM

Wall Street is back in sell-off mode again today, and there's no great reason stocks are down sharply. As fellow Fool Dan Dzombak mentioned earlier today, unemployment claims actually fell last week in another small sign of an improving employment picture. But that wasn't enough to get investors buying, and the Dow Jones Industrial Average (DJINDICES:^DJI) is down 1.6% late in trading.

The tech-heavy Nasdaq Composite (NASDAQINDEX:^IXIC) is faring even worse, down 3.2% today. Anything that's even remotely related to technology or biotech is tumbling, led by some of the best stocks of 2013.

Growth stocks fall off in Thursday's trading
For more than a month now the Nasdaq has been selling off compared to a flat Dow Jones Industrial Average. You can see in the chart below that it has trailed the Dow by nearly 5%.

^DJITR Chart

^DJITR data by YCharts.

The simple reason for this underperformance is that investors are selling growth stocks that wildly outperformed the market last year. Companies like Tesla Motors and Facebook are prime examples of companies that had great years last year but still trade at crazy price-to-sales multiples -- 12.5 and 19, respectively.

FB PS Ratio (TTM) Chart

FB PS Ratio (TTM) data by YCharts.

The correction since the beginning of March is just bringing these stocks back to earth.

A similar trend is playing out throughout the tech industry, where valuations likely got ahead of themselves last year. Remember that GDP grew just 2.6% in the fourth quarter and is hovering in the low single digits. In that economic climate, the stock market rise of around 30% last year means that multiples were on the rise without much earnings growth at all. Eventually, either earnings will have to grow to live up to these lofty expectations or stock prices will have to come down.  

Today we're seeing the latter, and while it may be a short-lived sell-off, it's worth thinking about whether your stocks have reached overvalued territory. For my money, Tesla Motors and Facebook are both far too expensive in today's market, and I'd be taking profits, too, if I owned shares.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Facebook and Tesla Motors. The Motley Fool owns shares of Facebook and Tesla Motors. 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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