Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Stocks recorded their second consecutive losing week (following an eight-week winning streak), as the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) fell 1.6 and 1.7%, respectively. However, three large-cap technology stocks, Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Netflix (NASDAQ:NFLX) made big moves this week (the green line represents the S&P 500).
Facebook benefited from an "index effect" this week, as S&P Dow Jones Indices announced late Wednesday they would be adding shares of the social-networking company to the S&P 500 after the market close on Dec. 20. Traders positioned themselves ahead of massive buying by index funds, pushing the stock up 8% following the announcement, for an 11.2% gain on the week.
With a market capitalization of nearly $130 billion, Facebook is a logical addition to the large-cap index (it replaces the Williams Companies -- market value: $23.4 billion). The S&P Index Committee is simply recognizing the rise of social networking companies and Facebook's prominence within that group.
The addition is also a fitting way to cap a year in which the market put behind it Facebook's horrendous May 2012 initial public offering and concerns regarding the transition to a mobile platform. The result of this "comeback"? Superlative stock price performance: As of Friday, the stock has doubled so far this year. Still, individual investors ought to keep in mind that, at 50 times forward earnings for a $130 billion market value, the market is setting a very, very high bar for the company's future operating results.
Facebook's index effect may have spilled over into the trading of Twitter shares, but it's not enough to explain their whopping 31% rise this week. In fact, as best as anyone can tell, the rally was sparked by last week's release of a targeted ad product, which tailors ads to individual users based on their Web browsing history. However, as Brian Wieser of Pivotal Research told CNBC on Thursday, "this really illustrates how little investors who are buying into this understand the company -- that they're bidding up the stock by 10 and 15 and 20 percent for a product announced in July."
Uninformed investors are not the best group to be setting the value of a stock. As with Facebook -- only much more so -- Twitter's valuation now looks like a very heavy burden on the company if it is to deliver results that will justify solid stock returns from current levels. Or, to get back to Wieser's CNBC interview:
Twitter is an amazing company -- fantastic management, great ad products, wonderful traction. The problem is it's just simply overvalued. Now, to the extent that the stock will fall, eventually it will. It probably has to.
I share that view.
Rounding out the trifecta of solid technology companies that look pricey, Netflix shares gained 4.1% this week. On Friday, the company released data from a study that proved what some of us dedicated Netlfix customers already know: "Binge viewing" is real. Indeed, roughly half of the users in the study went through an entire show's season (up to 22 episodes) within a week. Apparently, investors are taking to the stock with the same intensity; at Friday's closing price, the shares are valued at a spectacular 113 times the next 12 months' earnings-per-share estimate. That's a lot less attractive as a value proposition than Netflix's entry-level $7.99 per month streaming-only plan.
Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends and owns shares of Facebook and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.