The net result of this week's volatility in U.S. stock markets: Not much, as the benchmark S&P 500 rose just 0.5% on the week. The narrower Dow Jones Industrial Average (^DJI 1.26%) was essentially flat, with an 0.1% gain on the week. However, the volatility does show up at the level of individual stocks: Herbalife (HLF 2.03%) performed very well; meanwhile, many high-profile growth names were trampled in what looks like a mini-flight out of stocks that have benefited from enormous momentum, including Tesla Motors (TSLA 6.24%) and Netflix (NFLX 2.08%).
Earlier this month, Herbalife disclosed that it is the object of a Federal Trade Commission investigation, which helped activist investor Bill Ackman's bet against the company (the investigation is the fruit of Ackman's lobbying efforts). This week, conversely, the stock was the second-best performer in the Russell 1000, up 12.3%, on news that Ackman's rival, legendary investor Carl Icahn, is placing three more of his representatives on Herbalife's board, for a total of five out of 13 board members. Icahn Enterprises is the nutritional supplements distributor's largest shareholder, with a 16.8% stake, and it has an agreement with the company that allows it to raise that stake up to 25%.
I will repeat what I have already written here: I strongly urge individual investors to sidestep this special situation, which is complicated and does not trade on fundamentals, but rather on news flow and sentiment. It's entertaining, it's educational, but it isn't investing.
Tesla Motors' stock performance this week (-7.2%) was well within the bottom decile of the Russell 1000. UBS initiated coverage of the stock on Wednesday, praising the automaker's "disruptive model," but warned that "investors should appreciate that the downside this early in its life is material." Shares of Tesla Motors are down by a fifth relative to the all-time high they established little more than a month ago, but that still leaves them up 41% on the year. Deutsche Bank and Wedbush Securities also published research on the company this week; however, in my opinion, the most interesting piece of research that surfaced this week is available to all on the blog of NYU Professor Aswath Damodaran, the guru of equity valuation.
In his latest blog post, Damodaran revises his valuation for Tesla upwards from $67 to $112.50. He is full of praise for the company and its leader, Elon Musk, but he simply cannot reconcile the numbers with the current stock price without making assumptions that he deems unrealistic. The post, in which Damodaran expands on the right and wrong reasons for owning the stock, is a must-read for every investor -- whether you have a position (long or short) in Tesla Motors or none at all.
With an 11.4% loss on the week -- the seventh-worst performance in the Russell 1000 -- Netflix's stock was another example of momentum in reverse among high-flying growth names. There were a couple of stories in this week's news that were unfavorable to Netflix. The first, which ran a week ago in The Wall Street Journal, has Apple and Comcast in talks to offer a rival service via an Apple set-top box; however, the article indicated that talks are not at an advanced stage and that some major points would still need to be ironed out, including who controls the relationship with the customer (and their data!).
The second, also published in the Journal, suggested that Amazon.com is planning a free, ad-supported streaming video service. Amazon has since denied it is planning it is a planning a service as described in the piece.
It's always possible to attach fundamental stories to the price action in a stock (and sometimes the association is legitimate); however, I think there may be a broader factor at work here. I don't think it's a coincidence that Tesla Motors and Netflix, as well as Facebook and Twitter -- all stocks that have experienced stratospheric run-ups in price -- were all among the worst-performing stocks last week. Instead, it looks to me like investors are letting some of the air out of these "story" stocks, a process that was looking overdue -- and which could have more to run yet.