The Great Social Media Stock Bubble of 2014

A few days ago, I woke up to news that reminded me of the “Dot-com Boom” of the late 90s and early 2000. I’m sure you remember those days—the days when any company with “.com” attached to it received a lot of attention….and a high stock price. Investors bought these stocks without any concern for non-existent revenues; forget earnings.

These days, social media stocks are the new “dot-com” wonders. We recently heard that Facebook Inc. (NYSE/FB) bought “WhatsApp,” an instant massaging application for smartphones, for $19.0 billion. The valuation doesn’t make much sense; the company has only 50 employees, 460 million monthly users, and no clear business model.

Last year, we saw Twitter, Inc. (NYSE/TWTR) do an initial public offering (IPO). On its very first day of trading, the stock price increased by more than 70%. This company lost more money in 2013 than it did in 2012. Twitter’s loss per share in 2013 amounted to $3.41 compared to a loss of $0.68 in 2012. (Source: Twitter, Inc., February 5, 2014.) But investors shouldn’t fear; in the last quarter of 2013, hedge funds got into the game and bought Twitter’s stock.

Dear reader, I’m not saying Facebook or Twitter is a sell. What I am saying is that the behavior we see on the key stock indices, especially for social media stocks, is not sustainable. It resonates with what we have seen in the past—investors pouring money into companies with no business model to generate profits.

In Allan Greenspan’s past words, key stock indices are showing signs of “irrational exuberance.”

I’m concerned about the big picture for key stock indices.

Risks for key stock indices increase almost daily, but few market participants say this is the case. Few want to hear about risk when key stock indices are going higher. This was the case back in 2007 and again as the dot-com bubble burst in 2000.

Irrationality among investors is soaring…they are ignoring warnings from the public companies themselves about their corporate earnings. So far, 66 companies on the S&P 500 have issued negative guidance about their first-quarter corporate earnings. (Source: FactSet, February 14, 2014.)

Between December 31 and February 14, analysts have dropped their corporate earnings-per-share estimates for S&P 500 companies by three percent. (Source: Ibid.)

I believe that at this juncture in the stock market’s rebound from its 2009 lows, the smart money has moved away from key stock indices and towards safety. I have been talking about this since the beginning of the year. Gold-related investments have gone up so far in 2014, while stock prices of companies on the key stock indices have gone down. (In the first 34 trading days of this year, gold prices have declined on just 12 of those days. In the same period a year ago, they declined on 20 days.)

I am watching key stock indices very closely. With the increase in risks, I keep my stance, preferring to preserve capital.

This article The Great Social Media Stock Bubble of 2014 was originally published at ProfitConfidential